Letter from the CEO Apply the spirit of the tortoise to catch up with the Dragon spacecraft

There is a fable about the race between a tortoise

I. Large companies are not necessarily

and a hare. The hare was born a fast runner, but

synonyms for complacency or conservativeness;

during the race, it had a rest from time to time,

it is not inevitable for them to perish, or

taking an afternoon tea or having a nap on the

otherwise we would not strive to be one.

grass. The tortoise surpassed the hare and won the race in the end.

Can BMW match Tesla’s pace? This has been an issue of debate for some time at Huawei. Most

Huawei is like a big tortoise. In the past 25 years,

believe that Tesla vehicles represent a disruptive

we have crawled along, not seeing the flowers on

innovation and will surpass BMWs. I think that

the road. While many people have become rich,

BMW may not lose the game if they take an open

riding on the rising economy over the last two

approach to improve themselves. We know there

decades, we still are on our journey of hard work

are several elements of a car: powertrain, smart

and dedication. When we look up to find in front

driving (from on-line map, automatic shifting,

of us the likes of Dragon spacecraft and Tesla,

bump shielding, all the way to unmanned driving),

and look at ourselves – the clumsy way we move

mechanical wearing, and safety and comfort. BMW

ahead, we can’t help but think, “Can we catch up

is strong in the last two areas, and they can

and surpass them?”

catch up too on the first two if they are open

Letter from the CEO

3

and progressive. You could argue of course that

1. We must stay focused. We are a company with

Tesla can buy the capabilities they don’t have, but

limited capabilities and resources. We can only

I’m not saying BMW has to reinvent the wheel

catch up with or surpass US companies within

to establish themselves in the first two areas.

limited areas. A force applied over a smaller

BMW needs success, not a narrow sense of pride

surface area can get us larger pressure, and then

that everything has to come through its own

breakthroughs would be possible. The Strategy

innovation.

& Development Committee proposed the idea of surpassing US companies and enjoying the

Huawei is like BMW, in that we are also a big

ride, and I guess maybe that’s because they are

company. We live in an information society that is

confident in our profitability in the next few years

fast-changing with lots of disruptive innovations.

and want to invest more in the strategic areas.

Can we continue to survive? Admit it or not, this

However, we can possibly surpass US companies

is a question right in front of us. It took us 25

only when our area of focus is as big as the

years to build a good platform and accumulate

tip of a needle. If we enlarge the focus area to

some resources. Those are our treasures, as they

the size of the head of a match or the end of a

came after loads of money being wasted by our

stick, surpassing US companies will be out of the

executives and experts into projects and products

question.

that had failed. Of course the money wasted comes from what you have earned in the first

We only allow employees to leverage their initiative

place, and more importantly without such wastes,

and creativity along the main route, or in other

we would not be where we are today. We value

words in areas of our strategic business focus. Blind

the success we have gained through learning from

innovation would simply disperse our investment

our failures. If we continue to be progressive,

and energy. Businesses that are not on the main

with the courage to shatter our own vested

route have to learn from successful companies,

interest and embrace new things, Huawei may not

maintain stable and reliable operations, and keep

necessarily lag behind. When we spot a strategic

the management system rational, effective, and

opportunity, we can catch up quickly by pouring

simple. We must avoid innovating blindly. If there

in tons of resources. Different ways of investment

is cry for innovation everywhere, that will be a

can be used, not just by piling up people. This

death song for us.

is quite different from the way small companies approach innovation. People are the most valuable.

The age of Big Data might be terrifying, because

Employees who are open-minded, progressive,

nobody knows exactly what is Big Data, and data

brave to break established advantages and keep

traffic will be incredibly huge. The Big Data I’ve

up with the times are our most solid cornerstone.

been talking about is different from the industry

With such people in the company, we can possibly

definition. The industry looks at Big Data from

catch up with the Teslas of the world.

information search, not data size, point of view.

4

Letter from the CEO

As Wu Hequan from the Chinese Academy of

The network might loosen what has kept people

Engineering said, data creates value only when it

within bounds. Without this bondage, can we still

is mined, analyzed, inducted, and utilized. By Big

press forward like a torrent? Many people are

Data, I mean the surging and overwhelming data

amazed when they hear us sing the song Huawei

streams, and the fact that no one knows how

People. They wonder why so many people are still

much data has to be transmitted and stored. Of

singing such a song in such an age. At Huawei we

course, we hope what is transmitted is all useful

still have a nucleus of several thousand people.

information, but we cannot stop garbage from

United together, they rally and lead the rest of

being transmitted and stored back and forth,

150,000 employees. We will definitely win.

which makes Big Data even bigger. Don’t get lured by the success of the Internet. We are an Internet

2. We must continue to be dedicated. The tortoise

company too, in the sense that we produce “iron

in the fable is a symbol of persistent effort, and

sheet” for pipes that transmit data streams for

such a spirit of Huawei must not change. The

the Internet. Moving forward, there will be fewer

tortoise spirit also means that our effort and

companies that can produce “iron sheet” for pipes

dedication should be sensible. We don’t need our

as wide as the Pacific Ocean; companies that run

people to have their blood boiled up because that

the pipes will be in the number of hundreds, and

cannot power up the base stations. What we need

companies managing information in the number of

is a controlled passion that allows our people to

thousands. Don’t envy the prominence of others;

work intensely but with order. Value creation has

don’t get so stirred about the Internet. Employees

to be the yardstick for everything we do.

who have such passion should come down-to-earth and try to use the Internet approach to optimize

We must be conscious of the power of the United

our internal supply transactions toward higher

States. They have advanced systems, flexible

efficiency and timely and accurate operations. Our

mechanisms, clear property rights, and respect

annual turnover of commercial notes, including

and protection of individual rights. With such a

internal handovers, has exceeded CNY2,500 billion,

sound business ecosystem, the US has attracted the

expected to reach 5,000 billion pretty soon. And

world’s best talent, in the number of hundreds of

we have more than 5,000 points of supply. There

millions, to invent and innovate on the American

is significant value there, from improving contract

soil. The light that never goes out in the Silicon

accuracy and reducing waste via thorough analyses

Valley continues to shine. The US is not lagging

of contract scenarios. Why not do the “Internet”

behind; it is still a model for us to learn from. Isn’t

internally to better connect our operations? We

Tesla a good example? Catching up will never be as

have to remain focused, for decades, on improving

easy as coining catchwords. Too many catchwords

our capability for the information pipes. Don’t tow

are a waste in management. “Enjoying the ride” as

our huge ship away from the main route.

Eric Xu put it, means we make constant effort for development, fearless of failures or sacrifices. All the work has to be measured by the value created.

Letter from the CEO

5

Will ultra-broadband be the last battle in the

With the establishment of the 2012 Laboratories,

electronic equipment manufacturing industry? I

we intend to use the tool of self-criticism to

don’t know what others think about it; but to

question ourselves, our status quo, our future

me, it will. If we fail in the ultra-broadband age,

thoughts, and the questioning itself. 2012

we will have no more chance to turn it around. I

Laboratories is studying the approaches of adapting

was in Moscow not long ago. I told our people

to disruptive technical innovations, as well as the

there that the city of Moscow is one circle after

ways of applying sustaining innovations to today’s

another, and the country’s most powerful and

technologies in order to make them future-proof.

wealthiest people live in the area encircled by

In the age of Big Data, we must move decisively

MKAD (the Moscow Ring Road). For more than

to seize the high ground and create high-end

ten years however, no Huawei equipment has been

products that meet customer needs. With regard

deployed within MKAD. Can our ultra-broadband

to our low-and-mid-ranged products, consumer

prosper in Siberia? If we cannot grab opportunities

electronics from Germany and Japan should be

in high-value locations with massive data traffic,

the benchmark for the hardware, which ideally

then our business in that market will eventually

does not need any maintenance throughout the

shrink and we will be marginalized. Today the

service life; the software can be upgraded online.

paradigm of value distribution is being redefined.

Our high-end products are not absolutely stable,

To survive, we must strive to establish ourselves at

so our services have to come along.

high-value regions with massive data traffic. Our technology is being used in Tokyo, London, and

The times are moving way too fast. If we are

many other major cities. I believe we will also build

complacent and stand still just for three months,

our presence within MKAD of Moscow.

we will be erased from history. We survive till today because we have been embracing self-criticism

3. Self-criticism is the most important behavior

since a long time ago. In 2013, our Board

for survival. It has started in our company since

members reflected on the company’s problems

we embraced the beliefs that “from the ashes the

in the Bombarding Huawei series; our mid- and

phoenix is reborn” and “those who climbed out of

senior-level managers wrote and published

the pit of setbacks are sages”. Such self-correction

Management Issues in Our Eyes. There were a

has helped us to maintain steady growth over the

mountain of such introspective articles. I reviewed

years.

and edited every piece of them before being published. Our people can also post their critical

Our company moves forward on two wheels:

opinions at our online forum. Sooner or later there

technology innovation based on customer needs,

will be departments coming out to resolve these

and scientific exploration into the longer future.

issues. The company will keep improving itself.

Huawei must have the courage to embrace disruptive innovations through self-reinvention and self-criticism. While fully tapping into the value of our installed business, we should not be pushing away disruptive innovations in the fear they might smash our “golden bowl”.

6

Letter from the CEO

II. Core values are the heart and soul of an

soldiers in huge number. The CC3s in our company

organization. The organizational structure in

today are mobilizing the resources they need

the future must fit in with the information

through prompt and accurate calibration using

society. Organizational setup is meant to serve

the corporate platform. And the support to the

nimble strategies and tactics.

frontline, be it sales, delivery, services, or finance, is being provided remotely. CC3s are not alone in

Over the past 25 years, with the help of Western

the field; on project estimation, bidding, delivery,

consulting firms and the efforts of several thousand

or finance, they have with them the support from

HR professionals, business managers and experts,

hundreds in the back office via the network. This is

we have established a pyramid model for human

what Ken Hu has described as “the squad leaders’

resources management as Ken Hu described. This

fight”. Leaders at CC3s should have the courage

has helped us to reach almost USD40 billion in

to fight; they should also keep the big picture

sales revenue. The several thousand outstanding

in mind with the ability of strategic thinking.

managers and experts who have developed and

That’s why we put forward the concept of

evolved the pyramid model are great ones. We

“major-general-company-commanders”. Why not

should grant them the honor of “human resources

colonel-company-commanders? It’s a deliberate

heroes”. Without their efforts and success,

exaggeration to make it more eye-catching. They

today’s pyramid restructuring would have been

are not real major generals of course. Nobody can

impossible. Pyramid-styled management is right

grant you that title. Unless you buy some buttons

for mechanized warfare in the past, in which the

and have them sewn on your collar. One button

cannon-shot was near and communication systems

will make you a major general, and two will make

not as advanced. Soldiers as a result must fight

you a lieutenant general.

face-to-face. When the general on the top of the pyramid signaled “Go” with his hand, tankmen

1. The difference in compensation to employees

at the bottom drove thousands of tanks onto

needs to be widened, based on the value they each

the battlefield; and soldiers in tens of thousands

contribute. “Engines” in the organization have to

charged forward fighting enemies eye-to-eye. This

be fueled to the full so that they can pull the train

was the only way to have enough firepower. In

to run faster and deliver more. To live our core

modern warfare however, as powerful long-range

values, we must have a group of people who set

weaponry is available, operations are done using

the example. People’s compensation is not based

satellites, broadband, Big Data, missiles, airplanes,

on their scope of management; it has to be based

aircraft carriers, and many more. Electromagnetic

on their contribution and responsibility-adjusted

waves become the new battlefield. Those who

result in the first place, and then their dedication.

call for and command all the resources may

Now the direction of our human resources policy

not be the general atop the pyramid, but CC3s

has been set. For next steps, we need to allow

(Customer Centric 3) right at the frontline. The

some flexibility in HR policies at different scenarios,

power projected from a thousand miles away

environments and regions.

is more effective than the face-to-face fight of

Letter from the CEO

7

I introduced the second law of thermodynamics

3. The internal talent market and the Strategic

from natural science into social science. The

Reserves are established as an important means to

intention is to widen the compensation gap so

improve capability. Bench resources are developed

that we will have a nucleus of several thousand

through real projects in the field.

people to lead the rest of us forward. We must always keep our team active to avoid “entropic

The internal talent market is a place for finding

death”. We will never allow the “black hole” to

Garcia and for dedicated employees, not a cradle

exist in our organization. Slacking off is that “black

for the laggards. The talent flow it facilitates

hole”. We must not let it suck away our light, heat,

will allow employees to find the most suitable

and vitality.

positions and also drive managers to improve their management. When things get moved, vitality is

2. We will experiment with the idea of

gained.

“major-general-company-commanders”. Projects should be staffed with the right management and

Through the Strategic Reserves like the “Tiger

expert teams based on project value and difficulty

Teams”, the strategic competition department,

as well as the value and contribution that the

and project managers, we aim to expedite the

projects have delivered. In the traditional pyramid,

circulation of organizations, talents, technologies,

those at the bottom are people of the lowest

management approaches, and experience in the

levels. But those are also the people who face

course of project operations. Also from project

customer CEOs, confront complex projects, and

operations, we can identify more outstanding

deal with extreme difficulties. People that were

managers and experts to lead our company toward

staffed at this level were far away from what they

future progress.

should be. We would like everyone to understand that hope We are having people with major-generals’

is in their own hands. If they work hard, they will

capability

Only

get good results. If they are made of gold, they

the

offices

be

company-commanders.

have

will shine sooner or later. Do not moan or live in

“major-general-company-commanders”. I’m not

that

are

profitable

can

memories; keep striving forward. For those who are

sure whether some of you would like to be Lei

united as a team in both good times and bad, their

Feng-style major-generals, doing all the good things

names and their deeds may very likely not appear

wanting nothing in return. Well I’m not a supporter

on the stone tablet of merits; such tablets record

to this idea. Lei Feng is a kind of spirit; it cannot

the achievements of generals. However, those

be used as a mechanism. The experiment has to

who have nothing engraved on the stone tablet

start from profitable representative offices that can

of merits might become commanders-in-chief

afford senior experts and managers. In this way,

in the future, organizing tens of thousands of

high-quality resources are channeled to high-quality

men. Nobody knows how the inner world of

customers. To have more capable resources to

commanders-in-chief develops. Selflessness is

better serve high-quality customers, you have to

greatness.

make more money from such customers in the first place; or otherwise where you can get the money.

8

Letter from the CEO

III. Nimble strategies and tactics come from

is about value creation, not value distribution. We

rigorous, well-organized, simple, and solid

must continue to strengthen our customer and

management.

supplier interfaces and simplify internal accounting and measurement.

Data traffic is growing, and our company is likely to become bigger. We can grow in size, but

Huawei’s management improvement, as Guo

complexity in management must not increase.

Ping said, has to be built on the improvement in project management. The eight critical roles

We aim to transition our corporate governance

for project management should be well selected

from a centralized model to a new one. Under the

and developed. Mature procedures and a large

new governance model, those who can hear the

management team with high caliber have to be

gunfire call for support; frontline organizations

established. We need to build a pool of managers

have both responsibilities and authorities; and

and experts on project management through the

corporate functions provide enablement and

Strategic Reserves. As people in the pool move from

supervision. Such a model must be built on

project to project, good methods and capabilities

an effective management platform including

are passed on to representative offices. We should

among others, processes, data, information and

be good at identifying the “golden seeds”, and

authorities. Over the past twenty-plus years,

have them blossom out at different locations.

with the help of Western consultants, we have

These transformations represent opportunities for

established a rather integrated platform that

various organizations to create value; they are also

provides guidance and support to the frontline.

the test bed to identify and develop future leaders.

In the next five to ten years, we will build on this foundation and gradually move decision making

The company’s management transformation

closer to the frontline with the right level of

over the years has produced a lot of outstanding

support for them to exercise authority.

people. We will begin to select and commend the “Ten Whiz Kids” to encourage those unknown

Guo Ping said our growth should no longer be

heroes who have contributed to the company’s

driven by scale, but efficiency and effectiveness.

development. Guo Ping said we should look for

Project operations management is an important

those “Whiz Kids”. And I think we have to find

way to get there; it is also a basic skill required

them and honor them with recognition; such search

of all the managers. Performance management

and commendation should cascade down the

both embodies and supports improved leadership

organization, so that those who have contributed

management and business transformation. We

to our success will feel inspired. While we select

should take a broader and longer perspective

outstanding talent for the future, we should not

in understanding responsibility-adjusted result

forget those who have made contributions in the

and performance. We have already optimized

past. Only in this way can our steps toward the

the performance metrics and we will continue

future be more solid. It is a law of history for the

to reduce the number of in-the-course metrics.

new to replace the old. However, we should never

Results are more important than the course.

forget those who have put their best times, their

We must go in the right direction on finance

health, or even their lives into Huawei, and the

management transformation. Finance management

role they have played in paving the way for the company’s sustainable development.

Letter from the CEO

9

We must take a holistic view to advance the overall

hard winter; we chose the “chicken rib” strategy,

management system. It should be systematic,

increasing the investment into areas where others

constructive, and simple. The management system

were stepping back. In the end we caught up. That

has to be well connected, and processes be

was a difficult time for the world, and even more

harmonized from end to end, to avoid silos from

so for Huawei. Without the courage to change,

isolated transformation. We must respect facts and

we would not be here today. Now we are seeking

ensure the match between the financial book and

changes again, but the situation we are in is much

the physical assets. We allow no lies. Whenever

better, and this time we change for prosperity and

possible, we should try to skip one hop in the

effective growth. We should have more confidence

handover of our internal operations data, provided

to overcome any hardship and difficulty, and more

necessary separation of duties are observed, so as

importantly to surpass ourselves.

to increase the operating efficiency. From the east of the Pacific to the west of the Further progress is expected not only in

Atlantic, from the north of the Arctic Ocean to the

technology and the market. We must also make

south of Southern South America, from the high

our management rigorous, well-organized, and

plateaus of Bolivia to the low lands of the Dead

simple. Internal transactions are to be done

Sea, and from the boundless tropical rainforests

electronically over time, built on transparent

to the scorching deserts... Tens of thousands of

data. A closed-loop management of planning,

Huawei people, leaving behind their home and

budgeting, and accounting will be implemented

family, work diligently in every corner of the world

to ensure sustainable business development. There

to bring network coverage to all. Where there are

has to be a balance between making investment

people, there are dedicated Huawei employees. We

and mitigating risks.

take on the mission of supporting communications services to nearly three billion people. Such a

Managers should get to know each other’s area.

mission keeps inspiring us to move forward.

Financial managers should know business and business managers know finance. We will have

The road ahead is broad and wide; our prospects

well-organized exchange of managers to facilitate

are brighter than ever. It’s a grand cause to be

such knowledge transfer. Frontline teams with

engaged, a cause that gives us unmatched pleasure

mixed knowledge and experience are better

and glory.

positioned to seize opportunities in an efficient, timely, and solid way, to balance project wins with healthy business operations, and to take advantage of the LTC and IFS processes that have been deployed. The closed-loop management will be used to improve the appraisal and selection of managers. Ren Zhengfei When we had the management conference back in 2002, the IT bubble just burst and Huawei was on the verge of bankruptcy with low level of confidence. The Board of Directors believed in changing the industry landscape during the

Chief Executive Officer

10

Letter from the Rotating and Acting CEO

Letter from the Rotating and Acting CEO

For the past two decades, together with our customers and partners, we have created a stably connected world. In the future, we will continue to be dedicated to our vision as we endeavor to become the leader of the ICT infrastructure industry and create greater value for our customers. We seek to make this connected world a better place to live and open the door for infinite opportunities and possibilities.

A driving force to move the world forward

ICT technologies – Huawei’s area of focus for the past 25 years – are changing from a support system

Connect closely to the world

that improves work efficiency to a production system that drives value creation. The result is

As everything becomes increasingly connected, it

that individuals, businesses, and organizations

is difficult to imagine a time without networks or

will become increasingly dependent on new

an instantaneous flow of information, just as 20

business models, new orders, and new patterns

years ago we could not imagine that information

for collaborative innovation and cross-boundary

would so rapidly and profoundly change how we

sharing.

live and work today. Provide connectivity As an important contributor to these historical changes, Huawei has never been more closely

adapt to market changes through self-restructuring. In response to the ICT convergence trend, we

2014: Strive for goals that bring value to

will further promote our internal organizational

Huawei

transformation,

simplify

management,

and

delegate authority to frontlines to ensure that our In 2014, the global economy will continue to

organizations in all three dimensions – customers,

recover. The increased coverage of ultra-

products, and regions – create value for customers

broadband and mobile broadband, especially

and take responsibility for our company’s effective

LTE, is set to bring new opportunities for the

growth, market competitiveness, and customer

further development of the telecommunications

satisfaction. To adapt to changes in the business

industry. Smart devices will become an intrinsic

environment, we will strengthen delegation to

necessity for digital natives and emerge as an

field organizations so that they can operate more

extension of the human sensory system. Driven by

flexibly and respond to customers’ high-value needs

the transformation of IT systems and the digital

more quickly. This transformation will increase the

restructuring of traditional industries, IT systems

operating efficiency of our organizations, further

are becoming a production system and a core

unlock our potential, and enable us to better serve

competency for enterprises. Thus, 2014 marks a

customers.

new beginning – not just for Huawei – but for the industry as a whole. While continuing to focus on

Glocalize our operations

strategy and simplify management in 2014, we will also work to expedite our effective growth

The

and lay the foundation for development over the

Protectionism and cyber security are just a few of

next decade.

the challenges and risks that we face. Under any

business

world

is

changing

rapidly.

circumstance, supporting the stable and secure Focus on strategic domains

operations of customers’ networks is our most honored commitment to our customers as well as

To seize valuable strategic opportunities, in 2014,

one of our core strategies. We will work closely

we will invest more efforts and resources in our

with all stakeholders to address cyber security

future growth. We must have the courage to invest

challenges.

in strategic domains, core technologies, strategic

Letter from the Rotating and Acting CEO

13

In 2014, we will continue to globalize by

tortoise has been evolving for millions of years

pooling together the world’s best resources to

and has outlived animals of all sizes, including

improve our efficiency and capabilities. We will

dinosaurs. In this process, it has surpassed itself.

delegate authority to local management teams, regardless of nationality, so that they can be truly

We live in an era of opportunities, challenges,

accountable for local operations. We will optimize

and risks. No one can accurately forecast or steer

the operations and management mechanisms of

the future amid such complex environments and

subsidiaries outside of China to ensure compliance,

uncertain markets; Huawei is no exception. This

build a harmonious business environment, and

leaves us no choice but to hold onto our core

contribute to local communities as a responsible

values, focus on our pipe strategy, engage fully in

corporate citizen.

what we do, and continuously evolve and develop at a solid pace.

Unite as many people as possible Huawei is still a young company, and the ICT We must unite as many people as possible as

industry is booming. A connected world has

we move forward. All outstanding employees,

unlocked opportunities beyond our imagination.

regardless of their age, nationality, gender,

Against this backdrop, our 150,000 dedicated

and cultural background, have equal access to

employees must have the courage to take the lead,

our platform to leverage their talents, develop

surpass themselves, and dominate the era. How

themselves, and contribute to the company and

many struggles are there in life? At Huawei, our

society at large. We will have a more human touch

philosophy is – no matter whether we can succeed

when managing our people and business. We

or not, let’s enjoy the ride!

respect and trust our employees, and encourage them to grow with the company. The overall

Huawei’s growth would not have been possible

compensation will be made more competitive and

without the trust and support of our customers

our long-term incentives will be made available

and partners. Let us join hands to create a better

to a larger number of high-performing Huawei

connected world!

employees across the world. All these initiatives are designed to motivate our organization and employees (including managers) to create more value for our customers. Achieve the goal of surpassing and enjoy the ride The spirit of the tortoise has enabled Huawei to survive. The tortoise is focused, persistent, and highly adaptable to environmental change. It travels across land and sea, regardless of weather

Eric Xu

and temperature, subsisting on seaweed. The

Rotating and Acting CEO

14

Business Highlights in 2013

Business Highlights in 2013

Enhancing resource integration worldwide

Changing the future with agile networks

We set up the Financial Risk Control Center (FRCC) in London to manage global financial risks and ensure that our financial operations remain efficient, secure, and standard-compliant. Our European Logistics Center was put into official operation in Hungary, covering countries throughout Europe, Central Asia, the Middle East, and Africa.

We launched the world’s first service- and user experience-centric agile network architecture, along with the first-of-its-kind agile switch S12700. These offerings are ideal for such new applications as cloud computing, Bring Your Own Device (BYOD), Software-Defined Networking (SDN), Internet of Things (IoT), multi-service support, and Big Data.

Leading 5G research and innovation

Enhancing brand competitiveness of smart devices

As a major facilitator of 5G projects initiated by the European Union and a founding member of the 5G Innovation Centre (5GIC) in the UK, we released a 5G white paper, proactively constructed a global 5G ecosystem, and carried out joint research in close collaboration with more than 20 universities worldwide. We played an active role in contributing to the development of future wireless technologies, industry standards, and the industry chain.

By adhering to a consumer-centric approach and a “Make it Possible” brand proposition, we continued to focus on a quality strategy. Our flagship device, the Ascend P6, achieved extraordinary results in terms of both brand awareness and profit. Historical breakthroughs were made in our smartphone business, and we were ranked among the top three globally. Global brand awareness of our mobile phones saw an annual increase of 110%.

Enabling large-scale commercial use of 400G routers

Building service value

Our commercial 400G router solution was recognized by 49 customers and put into large-scale commercial use. We were the first to launch a 1T router line card for backbone routers, a super-large-capacity 40T WDM prototype, and a new AOSN architecture. Maintaining our global leading position in LTE We remained the leader in commercial LTE deployment worldwide. Our solutions have been deployed in more than 100 capital cities and nine financial centers.

Huawei is committed to increasing service competitiveness. The capabilities of our service solutions and worldwide delivery organizations are continuing to advance, enabling us to deliver uniformly high-quality services on a global scale, tailored to local needs. The HUAWEI SmartCare® CEM solution has further extended our leadership in the telecom CEM area through scaled delivery of verifiable business value and constant innovation. We have worked with the TM Forum (TMF) to develop a CEM metrics system, becoming a leading player in the development of industry CEM standards. Our Managed Services have outperformed the market throughout the year. Huawei has become an industry-leading managed service provider (MSP) with strong business growth. In addition, we have steadily grown our consulting and system integration services and developed key capabilities in end-to-end network planning and evolution services.

15

Five-Year Financial Highlights

Five-Year Financial Highlights

CNY Million

2013 (USD Million)**

2013

2012*

2011*

2010*

2009*

Revenue

39,463

239,025

220,198

203,929

182,548

146,607

Operating profit

4,809

29,128

20,658

18,796

31,806

22,773

Operating margin

12.2%

12.2%

9.4%

9.2%

17.4%

15.5%

Net profit

3,468

21,003

15,624

11,655

25,630

19,430

3,724

22,554

24,969

17,826

31,555

24,188

13,529

81,944

71,649

62,342

55,458

38,214

Working capital

12,412

75,180

63,837

56,996

60,899

43,286

Total assets

38,226

231,532

210,006

193,849

178,984

148,968

Total borrowings

3,803

23,033

20,754

20,327

12,959

16,115

Owner’s equity

14,243

86,266

75,024

66,228

69,400

52,741

Liability ratio

62.7%

62.7%

64.3%

65.8%

61.2%

64.6%

Cash flow from operating activities Cash and short-term investments

* As a result of the application of new International Financial Reporting Standards (“IFRSs”) and amendments to IFRSs and to conform to current year’s presentation, certain comparative figures have been restated. ** Translated into United States dollar (“USD”) using the closing rate as at December 31, 2013 of USD1.00 = CNY6.0569

Revenue

Operating profit

Cash flow from operating activities

CAGR: 13%

CAGR: 6%

CAGR: -2%

CNY Million

CNY Million

CNY Million

250,000 200,000 150,000

239,025 220,198 203,929 182,548 146,607

100,000 50,000 0

09 10 11 12 13 Year

35,000

31,806

30,000 25,000 20,000

22,773

35,000 29,128

20,658 18,796

25,000 20,000

15,000

15,000

10,000

10,000

5,000

5,000

0

09 10 11 12 13 Year

31,555

30,000

0

24,188

24,969 22,554 17,826

09 10 11 12 13 Year

16

Letter from the Chairwoman

Letter from the Chairwoman

networking, has further accelerated the integration of the digital and physical worlds. Billions of people have mobile devices and tens of billions of “things” are connected to M2M modules with ubiquitous broadband access made available by mobile, fixed, and enterprise networks, generating copious amounts of data every few seconds. How can such a massive volume of data be transmitted, processed, stored, and presented? Huawei builds highly efficient and fully-connected digital logistics systems with this purpose in mind. Innovation connecting everyone Driven by information-based development, we are no longer restricted by physical boundaries – our world is becoming flat. With mobile networks Flowing water brings energy, vitality, and boundless potential. The increasing flow of information around the world is similar in that it enables humanity to share knowledge, ideas, and wisdom. As the costs associated with information flow are constantly reduced and efficiency is significantly boosted, society becomes more educated and empowered. This is remarkable progress! Today, information-based developments penetrate social-economic activities and nearly every aspect of our daily life as we embrace an era with massive data traffic. The new wave of ICT, characterized by mobile broadband, cloud computing, Big Data analytics, the Internet of Things (IoT), and social

entering the LTE era, cloud technologies have made businesses and organizations more efficient, while individuals can easily find entertainment and shop, study, and job-hunt through a rich variety of smart devices. ICT is the engine that powers innovation worldwide. We develop innovative technologies that can provide access to those who don’t have any, and faster access to those who do. In 2013, we deployed LTE solutions in over 100 countries around the world, allowing people to enjoy easy and fast access to wireless networks. We called for the industry to add 500MHz frequency bands to propel the mobile broadband industry forward and make broadband access available to a wider

set up the Financial Risk Control Center (FRCC) in London to manage global financial risks and ensure

Huawei’s products and services have enabled

that our financial operations remain efficient,

nearly half of the world’s population to enjoy easy

secure, and compliant. Our European Logistics

and affordable access to information networks.

Center, based in Hungary, makes the best use

We firmly believe that such networks increase

of regional resources and covers Europe, Central

opportunity and should be available to everyone.

Asia, the Middle East, and Africa. By localizing our operations and cooperating extensively with

Glocalized operations

local and global partners, we have improved our overall capabilities. In addition, our value chain

In the context of globalization, we believe that

enables fluid capability transfer across the entire

open, cooperative, and free trade policies are

world, creating great value. Through glocalization,

guarantees for improving the competitiveness of

we have created tens of thousands of jobs in

the ICT industry and promoting the development

local communities and helped to advance the ICT

of the digital economy. With a global view in mind,

industry in each market. Today, over 70% of our

we integrate the best resources with comparative

employees outside of China are local hires.

18

Letter from the Chairwoman

Building a robust network

Inspiring organizational vitality

The ICT industry relies on a global supply chain.

As our company becomes more globalized and

Each smartphone, tablet, PC, TV, and even

our business continues to develop, our Board of

home appliance has a global supply network,

Directors (BOD) needs to represent a wider range

which makes it increasingly difficult to trace the

of areas and embrace broader management views

source of security risks and threats. Society is

that will enable it to make timely and informed

increasingly dependent on networks, and the

decisions, thereby helping to ensure sustainable

scale and complexity of networks are increasing

and effective growth in today’s fiercely competitive

exponentially, increasing risks.

market. To this end, we increased the number of BOD members from 13 to 17. New members

To mitigate risks, we have incorporated security

were voted in by representatives of shareholding

requirements into our internal processes and

employees on December 27, 2013. The four new

established

and

directors have each worked at Huawei for over 10

trusted security assurance system. In the spirit

years and possess extensive experience in markets,

of cooperation, we have actively participated

technologies, and management; their experience

in standards activities in IEEE, IETF, OMA, UPnP

and insights will contribute significantly to the

Forum, Wi-Fi Alliance, and other such organizations

development of the company.

an

auditable,

sustainable,

to help ensure network robustness and security. In 2014, we will gradually restructure our business In 2013, we continued to support stable network

organizations to suit the era of ICT convergence.

operations in over 170 countries and regions,

This is the only way we can provide solutions that

particularly during critical incidents, natural

can fully meet customers’ evolving needs. While

disasters, and special events, including Hajj, the

building closer connections and partnerships with

Ya’an earthquake in China, and Typhoon Haiyan

customers to help them achieve success, we ensure

in the Philippines.

our own health and sustainable growth.

Letter from the Chairwoman

Sowing seeds of opportunity

19

have yet to be connected. Joining the connected world, they will acquire more knowledge, receive

In 2013, we deployed TD-LTE solutions in Africa,

a better education, and have more development

dramatically increasing access speeds and wireless

opportunities.

broadband coverage. This, in turn, reduced the cost of wireless broadband access and allowed more

I would like to extend my sincere gratitude to all

people to enjoy high-speed broadband networks.

staff members and their loved ones, and to our customers, partners, and industry organizations

We also actively promoted the development of

worldwide. As we move forward, let us work

ICT professionals and knowledge transfers in local

together to create a better connected world – for

communities to help them join the digital society.

everyone.

As of the end of 2013, Huawei’s “Telecom Seeds for the Future” program covered over 70 universities in more than 20 countries, benefiting over 10,000 students. We firmly believe that everyone should have citizenship in the digital society that will soon connect the entire world. Universal access is a step towards creating a level playing field. Information networks, which so many of us take for granted,

Sun Yafang

hold the potential to change the lives of those who

Chairwoman of the Board

20

Core Values

Core Values

tio

Te

ca

am

di

wo

De

rk

Customer s First

te gr ity

C Im ont pr inu ov o em us en t

In

Openness & Initiative

n

Core Values

Customers First

Dedication

H u a w e i e x i s t s to s e r v e c u s to m e r s , w h o s e

We win customers’ respect and trust primarily

demands are the driving forces behind our

through dedication. This includes every effort

development. We continuously create long-term

we make to create value for customers and to

value for customers by being responsive to their

improve our capabilities. We value employees'

needs and requirements. We measure our work

contributions and reward them accordingly.

against how much value we bring to customers, because we can only succeed through our customers’ success. Continuous Improvement

Our Value Propositions Resonating with the revolutionary changes taking place in the information industry, Huawei continuously innovates to meet customer needs and advance our technological leadership. We openly cooperate with industry partners, focus on building future-proof information pipes, and continuously create value for our customers and society at large. Based on these value propositions, Huawei is dedicated to enriching life and improving efficiency through a better connected world. In addition, we strive to be the first choice and best partner for telecom carriers and enterprise customers while becoming a brand of choice among consumers.

Enriching life and improving efficiency through a better connected world Ubiquitous Broadband Mobile and smart Large capacity and ultrabroadband Diversified access anytime anywhere Continuous and smooth evolutions

Agile Innovation Insights into the industry’s opportunities in the Big Data era Integrating resources for efficient collaboration Rapid delivery of innovative services Innovation of services and business models

Inspired Experience Simplified and personalized service experience True-to-life and diversified Zero wait time and rich communication Creating value through experience

to enhanced user experience made possible by such features as precise emotion recognition and

Enterprises and industries must rapidly gain insights

context awareness.

into business opportunities and continuously enhance IT-enabled organizational collaboration

Our goal is to provide industry-leading device

in order to launch new products and new services

products. Through innovations in key technologies

into markets better and faster. IT is transforming

(e.g., ambient intelligence, voice interaction,

from a support system into a production system

and new materials), industry designs, and cloud

and has become a core competence of enterprises.

services, we will take the user experience to a new level.

Huawei provides data center infrastructure solutions based on cloud computing to help customers enhance utilization of storage and computing resources, and enable business systems to be quickly deployed, easily operated and

maintained,

and

efficiently

managed.

Huawei also provides mobile office solutions that help customers improve work efficiency. Our intelligent data analysis system leverages Big Data technologies to help customers gain insights into business opportunities and make agile business innovations. The next 30 years will witness the gradual replacement of private data centers by public cloud data centers. Huawei is positioned to help carriers build public clouds and seize the tremendous opportunities presented by enterprise ICT cloud services.

modest growth, while the enterprise and consumer businesses both achieved rapid growth, increasing by over 35%. Thanks to the growth of infrastructure networks, professional services, and

CNY Million

smartphones, Huawei earned CNY84,655 million

Carrier Network

from Europe, the Middle East, and Africa (EMEA),

Business

which marks an increase of 9.4% in sales revenue

Enterprise Business

15,263

11,530

year-on-year. Due in large part to the development

Consumer Business

56,986

48,376

17.8%

of emerging markets in Southeast Asia, Huawei

Others

264

199

32.5%

maintained its growth momentum in the Asia

Total

239,025

220,198

8.5%

Pacific Region and achieved CNY38,925 million in sales revenue, up 4.2% year-on-year. In the Americas, the infrastructure network business grew robustly and the consumer business enjoyed continued growth in Latin American countries. However, due to business slowdown in North America, Huawei earned CNY31,428 million in sale revenue in the Americas, down 1.3% year-on-year.

239,025 Huawei achieved CNY239,025 million in sales revenue, an increase of 8.5% year-on-year.

technical support, network optimization, as well as technical and pre-sales training and certification.

Consumer Business

We are dedicated to building a strong global ecosystem of service partners through certification,

4G LTE is developing rapidly. In particular, the

authorization, enablement, incentives, and all-

Chinese market will lead the high-speed growth

around service support. Through this partner

of LTE around the globe in the coming years. This

ecosystem we serve customers by leveraging

will present historic opportunities for the rapid

our respective advantages. By the end of 2013,

development of our smart devices. By relying on

we had more than 800 certified and authorized

our end-to-end and leading advantages in 4G LTE,

service partners. Together with our partners

we will continue to launch high-quality mobile

we delivered over 5,000 projects during 2013.

phones by centering on consumer experience,

We have established a global ICT training and

improve consumer satisfaction by combining

certification program, including Huawei’s in-house

experience in hardware, applications, and services,

training centers, authorized training partners, and

and strive to become a leading global smart device

education projects with more than 30 universities.

brand.

Our training and certification program has helped develop ICT professionals around the globe. By

In 2013, our consumer business continued to

the end of 2013, we trained more than 16,000

maintain effective growth, earning sales revenue

individuals and certified more than 3,000

of CNY56,986 million, an annual increase of

engineers.

approximately 18%. Annual shipments totaled 128 million units. Historical breakthroughs were made

The information society is coming at an unstoppable

in our smartphone business, and we were ranked

pace. No industries and enterprises can be outside

among the top three globally. We continued to

of it. To ride on this trend, enterprises must

focus on a quality strategy and launched flagship

embrace advanced ICT technologies & solutions

devices, such as the Ascend P6 and the Ascend

for digital reforming to build leading advantages

Mate. The Ascend P6 was sold in more than 100

into the future. In 2014, we will continue to

countries, achieving extraordinary results in terms

make investments, consolidate resources, and

of both brand awareness and profit. Our Emotion

prioritize the build-up of marketing and channel

UI took user experience to a new level, and our

capabilities and teams in the enterprise business.

investment in the Huawei Fan Club has begun

We will use marketing to promote sales, attach

to pay off. Our share in the mobile broadband

Management Discussion and Analysis

35

LTE market further increased and we made

Our profit from home devices grew steadily. Our

landscape-shaping breakthroughs in telematics.

share in the fixed access market grew from 14%

Our share in the home access market further

to 21%, and we maintained our global leadership

expanded, with tablet sales increasing by more

position in the fixed wireless terminal market. We

than 200%.

cooperated with many top carriers and Multiple System Operators (MSOs) on set-top box (STB)

In the past year, our smartphone shipments

products. We have established a comprehensive

reached 52 million units, an annual increase of

product portfolio with low-end, mid-range, and

more than 60%. Smartphones accounted for

high-end tablets, and have seen tablet sales

more than 87% of total mobile phone shipments.

increase by more than 200%.

As for the revenue from channel sales, while consolidating our carrier channels, we further

Our Emotion UI took user experience to a new

expanded non-carrier channels. The revenue from

level. The number of cloud service users exceeded

open channels (excluding e-commerce channels)

10 million, with more than 1 million active users.

accounted for 45% of our total revenue and

In terms of user engagement, we implemented a

that from e-commerce channels accounted for

series of innovative marketing models, such as the

5%. In addition, the proportion of shipments of

“Tomorrow’s Partners” program, which achieved

our mid-range and high-end devices priced at

some favorable results. More than six million

more than CNY1,500 rose significantly to 12%,

Huawei fans enrolled in this program.

demonstrating that our quality strategy has yielded some success.

In 2013, we unveiled our “Make it Possible” brand proposition for the consumer business. By focusing

The global shipments of our mobile broadband

on consumer experience, we conducted a series

devices reached 44.5 million sets in 2013; we have

of branding campaigns worldwide, including

maintained a leading share in this market for six

sponsoring football games and clubs, such as

consecutive years. We continued to optimize the

La Liga in Spain, A.C. Milan in Italy, Borussia

overall product landscape. Global shipments of

Dortmund in Germany, and Arsenal in the UK.

LTE products reached approximately eight million

These campaigns significantly boosted brand

units, an annual increase of 103%. We actively

awareness for Huawei mobile phones. According

implemented a diversified channel strategy. In

to a survey by Ipsos, the global brand awareness

2013, the shipments of our mobile broadband

of our mobile phones reached 52% in 2013, an

devices through open channels exceeded four

increase of 110% year-on-year. This figure was

million sets and we developed large channel

68% in China, an increase of 113% compared

markets outside of China, such as Saudi Arabia,

with the previous year. In addition, the brand

India, Germany, and the Philippines. Our Internet

awareness of our mobile phones grew significantly

marketing efforts in the Chinese e-commerce

in Europe, South America, and Southeast Africa.

market also started to show results. Breakthroughs

Brand awareness rose by 230% in Germany, 213%

were made in telematics. We cooperated closely

in Italy, 200% in the UK, and 140% in Spain.

with multiple top international automobile manufacturers on the front-end module and

Our consumer business targets people of action

established strategic partnerships with multiple

who are also idealists — challengers who have

automobile brands.

vision, initiative, and belief that dreams can be realized through hard work. We strive to bring

36

Management Discussion and Analysis

the latest in technology to consumers everywhere.

markets, which helped promote our large-scale

In product development, we adhere to a quality

sales. In the development of e-commerce channels,

strategy, attaching the utmost importance to

sales from these venues began to generate results

improving consumer experience. We strive to

in 2013. Many of our products remained top

break through technical limitations to provide

sellers online, such as the Ascend Mate, Honor

innovations tailored to consumer requirements.

3 Outdoor, MediaQ M310, Honor 3C, and Honor

By doing so, we enable more people from around

3X. More than 10 million users pre-ordered the

the world to reap the benefits of technological

Honor 3C, setting a new sales record for Huawei

progress and realize their dreams. The Ascend

mobile phones.

product lineup includes the D series with the ultimate in technology, the P series with the

The development of 4G LTE is in full swing

ultimate in fashion, the G series that offers the

around the globe, and a “borderless network” is

best blend of performance and cost, and the Y

becoming reality. With different 4G LTE products

series that delivers the best in terms of accessibility.

and Huawei’s future-proof innovative technologies,

In the future, we will leverage our advantages in

consumers can connect using ultra-broadband

intelligent 4G LTE technologies, strive to make

with zero wait time anytime, anywhere. This level

the impossible possible, and provide ubiquitous

of connectivity provides added conveniences

high-speed connections to consumers. Our goal

and opportunities for consumers whether they

is to enable customers to better experience

are in the office, on the move, or at home —

unparalleled technologies.

smart devices are becoming the most important thing consumers take along. We are a latecomer

In 2013, we made notable achievements in channel

to the smart device field. 4G LTE presents a

development. Our revenue from open channels

unique strategic opportunity for us to surpass

grew by 98% year-on-year. In open markets where

our competitors worldwide by leveraging our

retail accounts for a high proportion of all sales,

advantages in 4G LTE networks as well as leading

such as China, Russia, Italy, the UK, Saudi Arabia,

technologies and patents. With our proven track

the Philippines, and South Africa, the sales of our

record in the communications field, we will lay

smartphones grew by more than 80%. In addition,

hold of this historic opportunity, deliver an inspired

we established strategic partnerships with top

experience, and bring more pleasant surprises to

distributors and retailers in China, Western

consumers worldwide.

Europe, the Middle East, Southeast Asia, and other

Management Discussion and Analysis

37

Results of Operations 2013 CNY Million Revenue Gross profit

2012

YOY (%)

Restated 239,025

220,198

8.5%

98,020

87,686

11.8%

– Gross margin

41.0%

39.8%

1.2%

Total operating expenses and other income

68,892

67,028

2.8%

– as % of revenue

28.8%

30.4%

(1.6%)

Operating profit

29,128

20,658

41.0%

– Operating margin

12.2%

9.4%

2.8%

Net finance expenses

3,942

2,039

93.3%

Income tax expenses

4,159

2,758

50.8%

21,003

15,624

34.4%

Net profit

Sales revenue in 2013 amounted to CNY239,025 million, which represents an increase of 8.5% year-on-year. Net profit grew by 34.4% year-on-year to CNY21,003 million. The improvement in profitability is mainly attributed to internal continuous management transformations that reduced operational costs. Thanks to the rising proportion of the enterprise business as well as improved profits from the consumer business, gross margin increased by 1.2% year-on-year.

38

Management Discussion and Analysis

Total Operating Expenses and Other Income 2013 CNY Million

2012

YOY (%)

Restated

Research and development expenses

30,672

29,747

3.1%

– as % of revenue

12.8%

13.5%

(0.7%)

Selling and administrative expenses

38,943

38,667

0.7%

– as % of revenue

16.3%

17.6%

(1.3%)

(723)

(1,386)

(47.8%)

(0.3%)

(0.6%)

0.3%

Other (income)/operating expenses, net – as % of revenue Total operating expenses and other income

68,892

67,028

2.8%

– as % of revenue

28.8%

30.4%

(1.6%)

In 2013, the company’s total expenses ratio decreased by 1.6% due to internal efforts aimed at continuously improving operational efficiency. Specifically, the selling and administrative expenses ratio declined by 1.3%, the research and development expenses ratio fell 0.7%, and the ratio of other income and other operating expenses (as % of revenue) rose 0.3%. Net Finance Expenses 2013 CNY Million Net foreign exchange loss Other net finance expenses Total net finance expenses

2012

YOY (%)

Restated 3,686

1,085

239.7%

256

954

(73.2%)

3,942

2,039

93.3%

Net finance expenses in 2013 amounted to CNY3,942 million, an increase of CNY1,903 million from 2012. This was attributable to an increase of CNY2,601 million year-on-year in net foreign exchange loss and a decrease of CNY698 million year-on-year in other net finance expenses.

Cash and short-term investment balance as of December 31, 2013 rose by 14.4% year-on-year to CNY81,944 million. Huawei’s days of sales outstanding (DSO) as of December 31, 2013 was 90 days, which is the same as that of 2012. Inventory balance increased by 12.1% year-on-year. The inventory turnover days (ITO) increased by four days to 64 days compared with 60 days in 2012. Trade payables balance decreased by 6.7% year-on-year. Huawei’s days of payables outstanding (DPO) as of December 31, 2013 was 80 days, 11 days shorter than that of 2012. Total short-term and long-term borrowings as of December 31, 2013 amounted to CNY23,033 million, an increase of 11.0% year-on-year from CNY20,754 million in 2012.

Cash flow from operating activities in 2013 decreased by 9.7% year-on-year to CNY22,554 million. This decrease was attributable to: ■

Net profit growth of 34.4% year-on-year due to rapid growth of consumer and enterprise businesses and reduction of internal management and operation costs.

■

Adjustment for depreciation, amortization, and non-operating loss, net contributed CNY5,550 million to the cash flow from operating activities, increasing by CNY2,386 million year-on-year.

■

In 2013, the change in operating assets and liabilities tied up in the cash flow from operating activities amounted to CNY3,381 million.

Financial Risk Management In 2013, Huawei continuously amended and improved its financial risk management policies and processes to further enhance the company’s capability to withstand financial risks and better support its business development. Liquidity Risk Huawei has continuously improved its system for cash flow planning, budgeting, and forecasting to better assess its short-term and medium to long-term liquidity needs. The company has implemented a variety of prudent financial measures to fulfill its overall liquidity needs, including centralizing cash management, maintaining a reasonable level of funds, and gaining access to adequate and committed credit facilities. In 2013, Huawei established the Financial Risk Control Center (FRCC) in London and set up a global liquidity risk monitoring team, to further improve its liquidity risk monitoring and management capabilities. As of December 31, 2013, cash and short-term investments increased by 14.4% year-on-year to CNY81,944 million. An adequate capital reserve and a stable cash flow from operating activities enabled Huawei to manage its liquidity and borrowing risks, thus ensuring financial stability for the company.

Management Discussion and Analysis

41

Liquidity Trends CNY Million

2013

2012

YOY (%)

Cash flow from operating activities

22,554

24,969

(9.7%)

Cash and short-term investments

81,944

71,649

14.4%

Long-term and short-term borrowings

23,033

20,754

11.0%

In addition to maintaining liquidity, Huawei also optimized the debt maturity structure to a more reasonable level. CNY Million Total borrowings

1 year or below

Above 1 year

3,043

19,990

Foreign Exchange Risk The Group’s functional currency is CNY and has foreign currency exposures related to buying, selling, and financing in currencies other than CNY, which are mainly USD and EUR. According to the foreign exchange policy guidelines of the Group, material foreign exchange exposures are hedged unless hedging would be uneconomical due to market liquidity and/or hedging cost. The Group uses the value at risk (VaR)* model to measure its foreign currency exposures, and uses the following techniques to mitigate such risks: ■

Natural hedging: The Group continuously structures their operations to match its receivables and payables in a foreign currency, to the extent possible.

■

Financial hedging: For certain currencies where natural hedging does not fully offset the foreign currency position, the Group hedges using a combination of short and long-term foreign currency loans.

* The VaR model is a statistical tool. Huawei uses this model to estimate the quantitative value of foreign exchange exposures under a certain confidence level within a period of time based on the Group’s net assets in foreign currencies, historical exchange rate fluctuations, and the relevancy between exchange rates.

42

Management Discussion and Analysis

Interest Rate Risk Huawei’s interest rate risk arises from its long-term borrowings and long-term receivables. Through the analysis of its interest rate exposures, the company uses a combination of fixed-rate and variable-rate bank loans to mitigate interest rate risks. Interest-bearing long-term financial instruments held by the Group as of December 31, 2013 2013 Effective

2012 Amount

interest rate

Effective

Amount

interest rate CNY Million

CNY Million

Fixed-rate long-term financial instruments – Long-term receivables

–

–

1.98%

(70)

– Long-term borrowings

4.59%

3,722

4.60%

3,788

3,722

Total

3,718

Floating-rate long-term financial instruments – Long-term receivables

–

–

4.20%

(337)

– Long-term borrowings

2.41%

16,268

2.24%

12,289

Total

16,268

11,952

As of December 31, 2013, assume that the interest rate fluctuates by 50 basis points, with other variables unchanged, the Group’s net profit and owner’s equity will increase (decrease) by CNY 81 million (in 2012, the amount was CNY65 million). For the financial instruments that are held at the end of the reporting period and expose the Group to fair value change risks due to interest rate fluctuations, the impacts on net profit and owner’s equity in the preceding sensitivity analysis are a re-measurement of the financial instruments based on the new interest rate, assuming that the interest rate changes at the end of the reporting period. For the floating-rate and non-derivative financial instruments that are held at the end of the reporting period and expose the Group to cash flow change risks due to interest rate fluctuations, the impacts on net profit and owner’s equity in the preceding sensitivity analysis are impacts on interest expense or income estimated on an annual basis due to interest rate fluctuations. The analysis of the previous year is based on the same assumptions and methods.

Management Discussion and Analysis

43

Credit Risk

Research and Development

The company has established and implemented

Huawei has set up 16 R&D centers in such countries

globally consistent credit management policies

as Germany, Sweden, the US, India, Russia, Japan,

and practices, processes, IT systems, and credit

Canada, Turkey, and China. Huawei employs

risk assessment tools. In addition, dedicated credit

approximately 70,000 product and solution R&D

management organizations have been established

employees, comprising 45% of our total global

across all regions and business units. The company

workforce.

has used risk assessment models to determine customer credit ratings and credit limits. It has also

We focus investment in key technologies,

implemented risk control points over key processes

architectures, and standards in the ICT field with

along the end-to-end sales cycle to manage credit

the aim of providing broader, smarter, and more

risks in a closed-loop manner. Huawei’s Credit

energy-efficient pipes that require zero wait time

Management Dept regularly assesses global credit

and create a better experience for users. We are

risk exposures, estimates potential losses, and

committed to continuous innovations, and have

determines bad debt provisions as appropriate.

made significant achievements in the fields of

In the event that a credit risk for a specific

future 5G communications, network architecture,

customer or outstanding trade receivable becomes

computing, and storage. We have worked closely

inappropriately high, a special handling process is

with partners from industry, academia, and

initiated to mitigate the risk.

research institutes, enabling us to take the lead in researching, innovating, and implementing future

Sales Financing

networks. We have also set up 28 joint innovation centers with leading carriers to translate leading

With global coverage, Huawei’s sales financing

technologies into competitive edges and business

team maintains close contact with customers to

success for customers.

understand their financing needs and taps into diversified financing resources around the world.

system as a key corporate strategy and considers cyber security a shared global challenge. Global

■

In the past year, we continued cyber security

collaboration among suppliers, customers, and

awareness training and education for all Huawei

policy and law makers is crucial to meaningfully

staff, thereby encouraging an atmosphere and

addressing global cyber security threats. As

culture conducive to promoting cyber security

such, all stakeholders must share knowledge

awareness education and regulating employee

and expertise, be practical and cooperative, and

behavior across the company.

Management Discussion and Analysis

■

We have embedded cyber security requirements

■

45

Our manufacturing capabilities continue

into our Integrated Product Development (IPD)

to improve in tandem with our security

process. Cyber security is built into everyone’s

capabilities. Our standardized end-to-end

daily work as well as each product and service,

manufacturing supply chain system enables

meaning that cyber security is everyone’s job.

us to more efficiently resolve security risks

We have also improved the approach that

during manufacturing in a safe manner while

instructs employees to design, develop, and

retaining quality, thus ensuring the integrity of

deliver our products with security in mind.

our hardware and software.

Apart from independent verification, each step of our work can be examined, improved, and

■

We have embedded key cyber security management requirements into all our service

automated.

delivery activities and stringently manage ■

We have greatly strengthened and improved

employees who have access to customer

our Cyber Security Technical Competence

networks, thus ensuring the security of

Center to incorporate security into design,

delivered products and services.

improve product robustness, and enhance privacy protection.

■

When things do go wrong or customers and researchers identify possible security issues,

■

We have established a multi-layer cyber security

we respond quickly and effectively to any

evaluation process that allows our products

vulnerability through our closely connected

to be independently tested and evaluated by

Product Security Incident Response Team

different teams; that is, our Internal Cyber

(PSIRT) and core R&D processes. In addition, our

Security Lab, the UK Cyber Security Evaluation

barcode system and electronic manufacturing

Centre (CSEC), customer evaluation teams,

system enable us to forward or backward track

and third-party audit and evaluation teams.

98% of the components used in our offerings

By doing so, we continuously provide our

within just a few minutes.

customers with optimum security assurance. ■ ■

As auditing plays a crucial role in ensuring

We have enhanced our comprehensive supplier

what a company or department claims is true

management system to monitor and evaluate

and effective, we ensure the implementation

the delivery and security performance of our

of cyber security policies, processes, and

qualified suppliers. We select suppliers that can

standards through our internal audit team.

contribute to the quality and security of our

This allows us to provide more effective and

purchased products and services and in turn

comprehensive oversight on cyber security.

benefit our customers.

46

Management Discussion and Analysis

Huawei is passionate about being transparent

Revenue Recognition

and open. We encourage full and frequent communication with all stakeholders, including

The application of accounting principles related

customers, industry, governments, and media. We

to the measurement and recognition of revenue

aim to raise the understanding of cyber security,

requires the company to make significant judgments

seek views and ideas for reducing security risks,

and estimates. Even for the same product, the

and collectively improve trust in terms of cyber

company often has to determine the appropriate

security.

accounting treatment after analyzing the contract terms and conditions. When installation, training,

We not only care about resolving past and present

and other services are rendered and sold together

cyber security issues. We also seek to lay the

with a product, the company determines whether

foundation for future development. Sticking to our

the deliverables should be treated as separate

commitment, we will continuously collaborate with

units of accounting and recognizes the revenue

all stakeholders to enhance our security capabilities

accordingly. When there are multiple transactions

in design, development, deployment, and other

with the same customer, the company applies

areas. We will continue to position cyber security

significant judgments to determine whether separate

assurance as one of our core strategies, maintain

contracts are considered as part of one arrangement

open and transparent policies, and act responsibly

based on contracts terms and conditions. When

in our operations to ensure a secure cyber world

an equipment that requires installation is delivered

for tomorrow.

and accepted by a customer at different stages, the company determines whether to recognize revenue

Critical Accounting Estimates

by stages based on assessment of whether the completed project is able to be used by the customer,

The consolidated financial statements, on which

and whether the obtained certificate of acceptance

this Management Discussion and Analysis was

would support payment collections.

based, have been prepared in compliance with International Financial Reporting Standards (IFRSs).

Revenue recognition is also impacted by various

For details, see note 1(a) to the consolidated

factors, including the creditworthiness of the

financial statements summary.

customer. The company regularly reviews estimates of these factors to assess its adequacy. If these

The application of IFRSs requires the company

estimates were to change, revenue will be

to make judgments, estimates and assumptions

impacted accordingly.

that will directly affect the company’s reporting of its financial position and operating results. The

For a construction contract, revenue is recognized

accounting estimates and assumptions discussed

using the percentage of completion (POC) method,

in this section are those that the management

measured according to the percentage of contract

considers to be the most critical to the company’s

costs incurred to date to the estimated total costs

consolidated financial statements.

for the contract. If at any time these estimates indicate the POC contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately as a cost.

Management Discussion and Analysis

47

Allowance for Doubtful Accounts

Inventories Write-down

The company’s gross accounts receivable balances

The company’s inventory balances were CNY24,929

were CNY64,220 million and CNY58,588 million

million and CNY22,237 million as of December

as of December 31, 2013 and December 31, 2012,

31, 2013 and December 31, 2012, respectively.

respectively. The allowances for doubtful accounts

Inventories are measured at the lower of cost or

were CNY4,340 million, or 6.8% of the gross

net realizable value. The difference between the

accounts receivable balance as of December 31,

cost of the inventory and the net realizable value is

2013, and CNY3,487 million, or 6.0% of the

recorded as inventory provision. Net realizable value

gross accounts receivable balance as of December

is the estimated selling price in the ordinary course

31, 2012. The allowances are recorded based

of business, less the estimated costs of completion

on the collectability of accounts receivable from

and the estimated costs necessary to make the

customers. The company regularly reviews the

sale. The following factors are considered for the

allowances for doubtful accounts by considering

recognition of net realizable value: purposes of

factors such as historical experiences, customer

the inventories held, inventory aging, percentage

creditworthiness, the age of accounts receivable

of inventory utilization, inventory categories and

balances, and current economic conditions that

conditions, and subsequent events with material

may affect a customer’s ability to pay.

influences on inventory value. The company reviews the inventory provisions periodically to

The company’s provisions for doubtful accounts

ensure its accuracy and reasonableness.

charged to the statement of profit or loss were CNY1,075 million and CNY3,479 million

The company’s inventory provisions charged to the

for fiscal years ended December 31, 2013 and

statement of profit or loss were CNY1,231 million

December 31, 2012, respectively. If key customers’

and CNY17 million for fiscal years ended December

creditworthiness deteriorates, or if the default

31, 2013 and December 31, 2012, respectively.

risk is higher than the historical trend, or if other circumstances arise, the estimates of the

Provision for Warranties

recoverability of amounts due to the company could be overstated, and additional allowances

When recognizing revenue, the company estimates

could be required, which could have an adverse

the possible future liabilities that it may incur

impact on the company’s profit.

under its product warranty obligations and records a warranty provision. The warranty provision balances were CNY2,963 million and CNY2,407 million as of December 31, 2013 and December 31, 2012, respectively. The company’s products are generally covered by a warranty period of 12 months. The company accrues for warranty costs as part of cost of sales based on historical expenditure on material costs, technical support labor costs, and associated overheads.

48

Management Discussion and Analysis

The warranty provisions accrued for fiscal years

the ultimate tax determination is uncertain. The

ended December 31, 2013 and December 31, 2012

company recognizes tax liabilities for anticipated

were CNY3,491 million and CNY2,844 million,

tax issues based on estimates of whether

respectively.

additional taxes will eventually be due. The company adequately accrues for tax liabilities for

Increases in warranty claims or higher cost of

all open audit years based on its assessment

warranty services will lead to actual warranty

of many factors, including past experiences and

expenses

warranty

interpretations of tax law. Deferred tax assets are

provisions, and will in turn adversely affect the

recognized to the extent that future taxable profits

company’s gross margin.

will be available against which the assets can be

exceeding

the

accrued

utilized. Income Tax Assessment of tax exposures and recognition relies The company is subject to income taxes in China

on estimates and assumptions and may involve a

and numerous foreign jurisdictions. Significant

series of complex judgments about future events.

judgment

Where the final tax outcome of these future events

is

required

in

determining

the

consolidated provision for income taxes.

is different from the amounts that were initially recorded, such differences will impact the income

During the ordinary course of business, there

tax and deferred tax provisions for the period in

are many transactions and calculations where

which such decision is made.

Industry Trends

49

Industry Trends Riding the digitization trend into a new industrial age The history of human society and civilization

Therefore, enterprises must restructure their

advancement is also a history of scientific

mindset, business, marketing, R&D, operation,

and

Numerous

and service models, based on the Internet rather

ICT technologies over the past half century,

technological

than simply overlaying traditional models with the

culminating

in

development.

Internet

Internet as a tool. Among them, restructuring of

innovations, have shattered the limits of time

various

ingenious

mindset is of paramount importance, as action

and space, bringing the human civilization into

comes after that.

an unprecedented new frontier. Today, we are entering an era of omnipresent networking and

■

Infiltrating beyond value delivery into value

information. However, this is just the start of a

creation, the Internet is set to redefine

greater information revolution. We are at the door

traditional industries

to the next wave of digital society. Business processes, though complicated, mainly “Internet+” drives the integration of the

comprise value creation and value delivery.

digital and physical worlds and shapes the

Value delivery is what we usually refer to as

next wave of information revolution

information flow, capital flow, and logistics flow. All the three flows have been smoothed out

Today, we are living in a time of Internet and

through mushrooming e-commerce platforms. In

information omnipresence, but the digital and

other words, the Internet has fully infiltrated and

physical worlds are still parallel to each other

transformed the value delivery process. As a result,

and not closely intertwined. For all industries

the digital and physical worlds are integrated, and

and enterprises, “Internet+” will be the focus of

the business chain is restructured, reducing or even

innovation. Traditional industries and enterprises

eliminating many intermediate processes.

are in particular need to realize digital reformation by leveraging the power of the Internet, driving

Currently, the Internet is starting its infiltration

deeper integration of the physical and digital

into value creation, especially the R&D and

worlds. This has become a new growth trend for

manufacturing

them.

comprehensive. It has a technical dimension, as

fields.

This

infiltration

is

we see in the case of Tesla redefining automobiles ■

The Internet is not just mere infrastructure, but more a brand new mindset

using IT and the Internet. It also implies changes in the R&D model, toward, for example, user participation and crowd sourcing. The

The essence of the Internet is being connected

manufacturing field is not immune to this. After

anytime, anywhere. Being an infrastructure

the steam engine, electricity, and IT, the Internet is

element just like the power grid, the Internet has

driving the fourth Industrial Revolution, or Industry

greatly boosted social productivity and reduced

4.0, enabling the integration of efficient mass

cost. However, the value of the Internet is far more

production with the diversity of individualized

than providing connectivity. Its impact is profound

manual workshops. With the infiltration of the

and revolutionary, as it represents a brand new

Internet and ICT into the value creation field, the

mindset, with the core being “all connected at

integration of the digital and physical worlds goes

zero distance” among people, enterprises and their

deeper. Transformation of traditional industries

customers, and business partners.

has just begun.

50

■

Industry Trends

Through data analytics, a core competence

It is no exaggeration to say that the core of the

for businesses today, the Internet will

Internet mindset is user-centricity. In designing

create new information monopolies and

products, delivering inspired experience, and

asymmetry while shattering the old ones

promoting brand image via word of mouth, user involvement is a must. However, this is not

The Internet makes information dissemination and

simply the building of online communities and

access impossibly easy. It breaks the traditional

user forums; it involves the transformation of

monopoly of knowledge and information by

management, R&D, and technological architecture.

certain industries and enterprises, who will find it hard to grab the high value they used to enjoy.

■

ICT is becoming the core of enterprise

But every coin has two sides. While shattering the

competitiveness that enables innovation

old one, the Internet has created new monopolies

and redefinition of the market

and asymmetry of information at a higher level. The Internet giants are collecting massive user and

In the information age, the enterprise ICT system is

transaction data, and leveraging Big Data analytics

not just a support system that improves efficiency

to fully explore user behaviors, thus creating new

and reduces cost, but a customer-centric business

information asymmetry and monopolies over the

and production system. It is shifting the focus from

other enterprises and service providers. A new

“digital management and IT assets” to “digital

monopoly at a higher lever then takes shape.

products and data assets.” It is fair to say that

Information has become an asset more important

ICT has become the core competence and engine

than physical infrastructure. Information and

that propels an enterprise’s business development

data operation are and will continue to be core

and enables innovation for enterprises to redefine

competences that carry great weight.

the market. This is true for any enterprise, be it big or small, from automobile manufacturers to

■

As power in the value chain shifts toward

hotdog stands. Irrespective of business scope and

users, users have to be fully engaged with

size, future enterprises must first be “high-tech”

their wisdom pooled together to build a

enterprises, fully leveraging ICT to upgrade and

new commanding height

transform themselves. Otherwise, they will be left with no chance, just like riding a horse in an

With the traditional information monopoly

attempt to catch up with a high-speed train.

shattered and information transparency increasing in general, users are getting more power.

As we embrace the next wave of digital society, we

Enterprises must go further than just responding

are seeing the infiltration of the Internet into value

to and meeting customer needs. A higher-level

creation and a deeper integration of the digital

of user-centricity is required that involves users

and physical worlds. “Internet+” has become the

in every business process, from requirement

focus of innovation in traditional industries and a

collection, product ideation and design, R&D,

starting point for their reformation towards digital.

testing, production, marketing, to after-sales services. Only by leveraging users’ collective wisdom can enterprises prosper, together with customers.

Industry Trends

Digital reformation: Riding the trend to win

■

51

Reforming business: Business models focusing on product digitalization and

in the future information age

cloud services are a must for enterprises The digital society represents an irreversible trend.

in the information era. Cloud services are

Riding on the trend to establish competitive

all about operations of users and their

strengths for today and into the future, and

data. By taking advantages of business

embracing digital reformation by applying the

model transformations powered by cloud

Internet mindset and ICT technologies, becomes an

computing,

inevitable choice. Such reformation toward digital

ICT-enabled cloud services to rebuild the

is not about just using the Internet as a tool; it is

telecom industry.

enterprises

can

leverage

far more comprehensive and profound. As discussed above, the integration of the digital ■

Reforming

new

and physical worlds is reflected in the trend of

business mindset around the core of “all

mindset:

Building

a

products towards digital. Every industry must

connected at zero distance”

figure out how to digitalize products. Cloud service is a new business model and business mindset.

When the Internet becomes omnipresent, it

While it differs with enterprises, ranging from

becomes an underlying business mindset too.

products, after-sales services, online information

Enterprises have to embrace the Internet as an

services, online games, to e-commerce, and

intrinsic mindset. Then they rebuild the external

e-banking services, its core boils down to user

formalities like business, marketing, and service

and data operation at a higher level, instead

models around the concept of “all connected at

of just product operation itself. Without cloud

zero distance.” Reformation of internal systems

services, enterprises lack the foundation for such

should then follow, to reengineer the management,

operations. The importance of cloud services as the

R&D, and operation models. Enterprise, in such a

foundation for future business is well illustrated by

way, will be redefined culturally, organizationally,

the example of Nike.

and process-wise. This trend creates a great strategic opportunity Mindset change is a very painful choice, but a must

for the telecom industry, as the ICT infrastructure

for industries and enterprises in transition. When

required for enterprise cloud services would

a new era dawns, the life-or-death question is

become a basic cloud offering itself. When we

not whether to change or not, but how fast you

look at the past history from 1900 to 1930, we

can change.

see enterprises relinquishing their own power

52

Industry Trends

generators and using electricity from power

■

Reforming ICT infrastructure: Building

plants, as well as the beginnings of IT deployment

DC-centric ICT infrastructure to fully

through primitive systems such as punchers and

explore the value of information and data,

tabulators. For the next 30 years, we expect to

the so-called “digital oil”

see history repeat itself, as enterprises back out of their own data centers and opt for purchased

We are the auditor of Huawei Investment & Holding Co., Ltd. and its subsidiaries (the “Group”). We have audited the consolidated financial statements of the Group prepared in accordance with International Financial Reporting Standards (the “audited consolidated financial statements”) for the year ended December 31, 2013. We have issued an unqualified audit report dated March 10, 2014 on the audited consolidated financial statements of the Group for the year ended December 31, 2013. Huawei Investment & Holding Co., Ltd. is not a public company and is not required to publish its audited consolidated financial statements under the Company Law of the People’s Republic of China. The Group publishes a consolidated financial statements summary set out on pages 55 to 105 comprising the consolidated statement of financial position as at December 31, 2013, the consolidated statement of profit or loss, the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information, which is derived from the audited consolidated financial statements of the Group. The audited consolidated financial statements and the consolidated financial statements summary do not reflect the effects of events that occurred subsequent to the date of our report on the audited consolidated financial statements. The consolidated financial statements summary does not contain all the disclosures required by International Financial Reporting Standards in the preparation of the audited consolidated financial statements of the Group, and that reading the consolidated financial statements summary is not a substitute for reading the audited consolidated financial statements of the Group.

Management’s responsibility for the consolidated financial statements summary Management is responsible for the preparation of a consolidated financial statements summary on the basis described in Note 1(a). Auditor’s responsibility Our responsibility is to express an opinion on the consolidated financial statements summary based on our procedures, which were conducted in accordance with International Standard on Auditing 810, “Engagements to Report on Summary Financial Statements”. Our work included examining, on a test basis, evidence supporting the consistency of the amounts and disclosures in the consolidated financial statements summary to the audited consolidated financial statements of the Group. We have not performed an audit on the consolidated financial statements summary, accordingly, we do not express an audit opinion. Opinion In our opinion, the consolidated financial statements summary derived from the audited consolidated financial statements of the Group for the year ended December 31, 2013 are consistent, in all material respects, with those consolidated financial statements, on the basis described in Note 1(a).

Impairment losses on initial classification as held for sale, and on subsequent

A non-current asset (or disposal group)

remeasurement while held for sale, are

is classified as held for sale if it is highly

recognised in profit or loss. As long as a

probable that its carrying amount will be

non-current asset is classified as held for

recovered through a sale transaction rather

sale, or is included in a disposal group that

than through continuing use and the asset

is classified as held for sale, the non-current

(or disposal group) is available for sale in

asset is not depreciated or amortised.

its present condition. A disposal group is a group of assets to be disposed of

(v) Segment reporting

together as a group in a single transaction, and liabilities directly associated with

Operating segments, and the amounts of

those assets that will be transferred in the

each segment item reported in the financial

transaction.

statements, are identified from the financial information provided regularly to the

Immediately before classification as held

Group’s most senior executive management

for sale, the measurement of the non-

for the purposes of allocating resources

current assets (and all individual assets and

to, and assessing the performance of,

liabilities in a disposal group) is brought up-

the Group’s various lines of business and

to-date in accordance with the accounting

geographical locations.

policies before the classification. Then, on initial classification as held for sale and until

Individually material operating segments

disposal, the non-current assets (except

are not aggregated for financial reporting

for certain assets as explained below) or

purposes unless the segments have similar

disposal groups are recognised at the lower

economic characteristics and are similar

of their carrying amount and fair value

in respect of the nature of products

less costs to sell. The principal exceptions

and services, the nature of production

to this measurement policy so far as the

processes, the type or class of customers,

consolidated financial statements of the

the methods used to distribute the products

Group are concerned are deferred tax

or provide the services, and the nature

assets, assets arising from employee benefit

of the regulatory environment. Operating

and financial assets (other than investments

segments which are not individually

in associates and joint ventures). These

material may be aggregated if they share a

assets, even if held for sale, would continue

majority of these criteria.

to be measured in accordance with the policies set out elsewhere in note 1.

76

Consolidated Financial Statements Summary and Notes

2. Changes in accounting policies The IASB has issued a number of new IFRSs and amendments to IFRSs that are first effective for the current accounting period of the Group. Of these, the following developments are relevant to the consolidated financial statements summary: Amendments to IAS 1, Presentation of financial statements – Presentation of items of other comprehensive income IFRS 10, Consolidated financial statements IFRS 11, Joint arrangements IFRS 12, Disclosure of interests in other entities IFRS 13, Fair value measurement Revised IAS 19, Employee benefits Amendments to IFRS 7 – Disclosures – Offsetting financial assets and financial liabilities The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period. Impacts of the adoption of new or amended IFRSs are discussed below: Amendments to IAS 1, Presentation of financial statements – Presentation of items of other comprehensive income The Group has chosen to use the new title “statement of profit or loss” as introduced by the amendments in the consolidated financial statements summary. IFRS 10, Consolidated financial statements IFRS 10 replaces the requirements in IAS 27, Consolidated and separate financial statements relating to the preparation of consolidated financial statements and SIC 12 Consolidation – Special purpose entities. It introduces a single control model to determine whether an investee should be consolidated, by focusing on whether the entity has power over the investee, exposure or rights to variable returns from its involvement with the investee and the ability to use its power to affect the amount of those returns. As a result of the adoption of IFRS 10, the Group has changed its accounting policy with respect to determining whether it has control over an investee. The adoption does not change any of the control conclusions reached by the Group in respect of its involvement with other entities as at January 1, 2013. IFRS 11, Joint arrangements IFRS 11, which replaces IAS 31, Interests in joint ventures, divides joint arrangements into joint operations and joint ventures. Entities are required to determine the type of an arrangement by considering the structure, legal form, contractual terms and other facts and circumstances relevant to their rights and obligations under the arrangement. Joint arrangements which are classified as joint operations under IFRS 11 are recognised on a line-by-line basis to the extent of the joint operator’s interest in the joint operation. All other joint arrangements are classified as joint ventures under IFRS 11 and are required to be accounted for using the equity method in the Group’s consolidated financial statements. Proportionate consolidation is no longer allowed as an accounting policy choice.

Consolidated Financial Statements Summary and Notes

77

As a result of the adoption of IFRS 11, the Group has changed its accounting policy with respect to its interests in joint arrangements and re-evaluated its involvement in its joint arrangements. The Group has reclassified the investments from jointly controlled entity to joint venture. The investments continue to be accounted for using the equity method and therefore this reclassification does not have any material impact on the financial position and the financial performance of the Group. IFRS 12, Disclosure of interests in other entities IFRS 12 brings together into a single standard all the disclosure requirements relevant to an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. The disclosures required by IFRS 12 are generally more extensive than those previously required by the respective standards. To the extent that the requirements are applicable to the Group, the Group has provided those disclosures in note 13 and 14. IFRS 13, Fair value measurement IFRS 13 replaces existing guidance in individual IFRSs with a single source of fair value measurement guidance. IFRS 13 also contains extensive disclosure requirements about fair value measurements for both financial instruments and non-financial instruments. To the extent that the requirements are applicable to the Group, the Group has provided those disclosures in note 9. The adoption of IFRS 13 does not have any material impact on the fair value measurements of the Group’s assets and liabilities. Revised IAS 19, Employee benefits Revised IAS 19 introduces a number of amendments to the accounting for defined benefit plans. Among them, revised IAS 19 requires all actuarial gains and losses to be recognised immediately in other comprehensive income. As a result of the adoption of revised IAS 19, the Group has changed its accounting policy with respect to defined benefit plans, for which actuarial gains and losses were previously recognised in profit or loss. This change in accounting policy has been applied retrospectively with consequential adjustments to comparatives for the year ended December 31, 2012 as follows: Effect of As previously

adoption of

reported

revised IAS 19

As restated

CNY million

CNY million

CNY million

2,240

(291)

1,949

Consolidated statement of profit or loss for the year ended December 31, 2012: Defined benefit plan expense Income tax Profit for the year

2,711

47

2,758

15,380

244

15,624

78

Consolidated Financial Statements Summary and Notes

Amendments to IFRS 7 – Disclosures – Offsetting financial assets and financial liabilities The amendments introduce new disclosures in respect of offsetting financial assets and financial liabilities. Those new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32, Financial instruments: Presentation and those that are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments and transactions, irrespective of whether the financial instruments are set off in accordance with IAS 32. 3. Revenue

Sale of goods and provision of services Rental income

2013

2012

CNY million

CNY million

238,948

220,084

77

114

239,025

220,198

4. Other (income)/operating expenses, net

Expense on factoring Government grants Net gain on disposal of property, plant and equipment, and intangible assets Others

2013

2012

CNY million

CNY million

550

762

(465)

(750)

(985)

(719)

177

(679)

(723)

(1,386)

Government grants During the year ended December 31, 2013, the Group received unconditional government grants of CNY307 million (2012: CNY588 million) in respect of its contributions to the development of research and innovation in the People’s Republic of China (the “PRC”). These grants were directly recognised as other income. During the year ended December 31, 2013, the Group received government grants of CNY686 million (2012: CNY523 million) which were conditional upon completion of certain research and development projects. These grants were initially recognised in the consolidated statement of financial position as deferred government grants and amortised through the consolidated statement of profit or loss on a systematic basis in the same periods in which the related research and development expenses are incurred. During the year ended December 31, 2013, conditional government grants of CNY158 million (2012: CNY162 million) were recognised in profit or loss.

these solutions to vertical industries such as governments, public utilities, enterprises,

China

energy, power, transportation and finance.

Europe, the Middle East and Africa

■

Consumer Business

2012

84,017

73,579

84,655

77,414

(EMEA)

Develops and manufactures mobile broadband

Asia Pacific

38,925

37,359

devices, home devices, smartphones, as well as

Americas

31,428

31,846

the applications on these devices, and delivers

Total

239,025

220,198

them to consumers and businesses. The reportable segments are determined based on the Group’s organization structure, management requirement and reporting system. Each reportable segment is managed separately because each requires different technology and marketing strategies. The financial information of the different segments is regularly reviewed by the Group’s most senior executive management for the purpose of resource allocation and performance assessment.

81

Consolidated Financial Statements Summary and Notes

9. Property, plant and equipment Machinery, Freehold land

electronic Buildings

equipment and other

Decoration Motor Construction

Investment

and

vehicles in progress

property

leasehold

Total

improvements

equipment CNY million

CNY million

CNY million

CNY million CNY million

CNY million

CNY million

CNY million

At January 1, 2012

50

7,357

14,412

5,304

567

4,272

32,446

Exchange adjustment

(1)

(2)

(14)

Additions

–

3

2,693

(3)

(17)

–

(8)

(45)

92

2,730

–

810

6,328

Transfer from construction in progress

–

1,969

1,131

–

Disposals and reclassification

–

(634)

(588)

(33)

(4,253)

–

1,153

–

–

(133)

(515)

(1,903)

At December 31, 2012

49

8,693

17,634

540

3,764

434

5,712

36,826

At January 1, 2013

49

8,693

Exchange adjustment

(1)

(12)

17,634

540

3,764

434

5,712

36,826

(341)

(22)

(70)

–

(65)

(511)

Additions

Cost: 484

58

13

2,530

83

3,179

–

239

6,102

Transfer from construction in progress

–

758

544

–

(1,963)

–

661

–

Disposals

–

(24)

(866)

(57)

–

–

(45)

(992)

106

9,428

19,501

544

4,910

434

6,502

41,425

At January 1, 2012

–

1,845

8,568

303

–

289

2,810

13,815

Exchange adjustment

–

(1)

(25)

(1)

–

–

(5)

(32)

Depreciation charge for the year

–

442

2,131

79

–

23

1,131

3,806

Disposals and reclassification

–

(120)

(517)

(28)

–

(27)

(437)

(1,129)

At December 31, 2012

–

2,166

10,157

353

–

285

3,499

16,460

At January 1, 2013

–

2,166

10,157

353

–

285

3,499

16,460

Exchange adjustment

–

(2)

(176)

(11)

–

–

(42)

(231)

Depreciation charge for the year

–

408

2, 403

68

–

22

856

3,757

Disposals

–

(18)

(667)

(49)

–

–

(36)

(770)

At December 31, 2013

–

2,554

11,717

361

–

307

4,277

19,216

At December 31, 2012

49

6,527

7,477

187

3,764

149

2,213

20,366

At December 31, 2013

106

6,874

7,784

183

4,910

127

2,225

22,209

At December 31, 2013 Accumulated depreciation:

Carrying amounts:

82

Consolidated Financial Statements Summary and Notes

Investment property The Group leased out certain buildings to third

The fair value of investment property is determined

parties. Such buildings are classified as investment

by the Group internally by reference to market

property.

conditions and discounted cash flow forecasts. The Group’s current lease agreements, which were

The carrying value of investment property as

entered into on an arm’s-length basis, are taken

at December 31, 2013 is CNY127 million (2012:

into account when estimating future cash flow.

CNY149 million). The fair value of investment

The fair value measurement is categorised into

property as at December 31, 2013 is estimated by

level 3 of the three-level fair value hierarchy as

management to be CNY252 million (2012: CNY273

defined in IFRS 13, Fair value measurement.

million). 10. Long-term leasehold prepayments* 2013

2012

CNY million

CNY million

2,361

2,223

Additions

462

198

Amortisation for the year

(62)

(60)

At January 1

At December 31

2,761

2,361

* For more information, please refer to the Appendix to 2013 Annual Report: Land Use Rights and Building Property.

Exchange adjustment Amortisation for the year Disposals At December 31, 2013 Carrying amounts:

The amortisation charge for the year is included in “cost of sales”, “research and development expenses”, “selling and administrative expenses” in the consolidated statement of profit or loss. The impairment losses are included in “other (income)/operating expenses, net” in the consolidated statement of profit or loss.

84

Consolidated Financial Statements Summary and Notes

12. Goodwill

Note

2013

2012

CNY million

CNY million

3,609

218

Cost: At January 1

(87)

Exchange adjustment Acquisitions through business combinations

29(c)

At December 31

(28)

44

3,419

3,566

3,609

220

–

Accumulated impairment losses: At January 1 Exchange adjustment

3

4

Impairment loss

–

216

At December 31

223

220

3,343

3,389

Carrying amounts: At December 31

Impairment tests for cash-generating units containing goodwill Goodwill is allocated to the Group’s cash-generating units (“CGU”) or group of CGUs, which is either an operating segment or at a level not larger than an operating segment, as follows:

During the year ended December 31, 2012, impairment loss of CNY216 million related to goodwill allocated to ITS Bahrain was recognised and the carrying amount of the goodwill allocated was reduced to nil.

86

Consolidated Financial Statements Summary and Notes

13. Interest in associates Details of the Group’s interest in the material associates are as follows: Form of business structure

All of the associates are accounted for using the equity method. Summarised financial information of the material associates, reconciled to the carrying amounts in the consolidated financial statements summary, are disclosed below: TD Tech 2013 2012 CNY million CNY million

Reconciled to the Group’s interest in the associates Gross amounts of net assets of the associate Group’s effective interest Group’s share of net assets of the associate Goodwill Net loss not shared by the Group Carrying amount in the consolidated financial statements summary

Tianwen Digital Media 2013 2012 CNY million CNY million

369 56 (429) (87) (91)

1,194 76 (1,189) (3) 78

302 8 (60) (2) 248

257 8 (15) (3) 247

3,972 (170)

2,801 78

139 1

10 (58)

(91)

78

248

247

49%

49%

49%

38

122

121

– 45

– –

5 –

5 –

–

38

127

126

49% (45)

Consolidated Financial Statements Summary and Notes

87

Aggregate information of associates that are not individually material: 2013

2012

CNY million

CNY million

143

79

42

(10)

Aggregate carrying amount of individually immaterial associates in the consolidated financial statements summary Aggregate amounts of the Group’s share of those associates’ profit/(loss)

14. Interest in joint ventures Details of the Group’s interests in the material joint ventures are as follows: Form of business structure

Place of incorporation and business

Huawei Marine Systems Co., Ltd. (“Huawei Marine”)

Incorporated

Chengdu Huawei Investment Co., Ltd. (“CD Investment”)

Incorporated

Name of joint venture

Proportion of ownership interest

Principal activity

2013

2012

Hong Kong, PRC

51%

51%

Construction and operation of submarine fibres

Chengdu, PRC

49%

49%

Investment, lease of property and machinery, developments of high technology products and provision of related services, sale of telecommunication and electronic products

(i) The Group purchased certain wealth management products from commercial banks with maturity less than one year. The principal and earnings of these wealth management products were not guaranteed. These wealth management products were classified as available-for-sale in accordance with the policy set out in note 1(o). (ii) As at December 31, 2013 and 2012, certain of the Group’s available-for-sale equity and debt securities were individually determined to be impaired on the basis of a material decline and adverse changes in the market in which the investees operated which indicated that the cost of the Group’s investment in them may not be recovered. Impairment losses on these investments were recognised in accordance with the policy set out in note 1(l).

90

Consolidated Financial Statements Summary and Notes

16. Deferred tax assets and liabilities (a) The components of deferred tax assets/(liabilities) recognised in the consolidated statement of financial position are as follows:

Net deferred tax assets recognised in the consolidated statement of financial position Net deferred tax liabilities recognised in the consolidated statement of financial position

(476) 11,101

(784) 9,021

Consolidated Financial Statements Summary and Notes

91

(b) Deferred tax assets not recognised At December 31, 2013 and 2012, deferred tax assets were not recognised in relation to certain unused tax losses and other deductible temporary differences. The unrecognized unused tax losses and deductible temporary differences are analysed as follows: 2013

2012

CNY million

CNY million

Other deductible temporary differences

1,008

574

Tax losses

1,463

1,396

2,471

1,970

Deferred tax assets have not been recognised in respect of certain provisions for impairment losses and other provisions as management believes that these provisions are unlikely to be allowed for tax deduction by the relevant tax authorities. Deferred tax assets have not been recognised in respect of certain unused tax losses as it was determined by management that it is not probable that future taxable profits against which the tax losses can be utilised will be available before they expire. 17. Inventories (a) Inventories in the consolidated statement of financial position comprise: 2013

2012

CNY million

CNY million

Raw materials

5,990

6,313

Work in progress

4,150

2,462

Finished goods

6,077

5,734

Goods delivered but not completely installed

8,712

7,728

24,929

22,237

(b) The analysis of the amount of inventories recognised as an expense and included in profit or loss is as follows:

Carrying amount of inventories sold Write down of inventories

2013

2012

CNY million

CNY million

99,694

96,551

1,231

17

100,925

96,568

92

Consolidated Financial Statements Summary and Notes

18. Trade and bills receivable 2013

2012

CNY million

CNY million

691

525

59,189

54,576

59,880

55,101

Bank acceptance bills

2,224

2,078

Commercial acceptance bills

2,967

2,106

798

1,041

5,989

5,225

65,869

60,326

335

497

65,534

59,829

65,869

60,326

Trade receivables Trade receivables due from related parties Trade receivables due from third parties

Bills receivable

Letter of credit receivables

Non-current portion Current portion

(a) Ageing analysis At the end of the reporting period, the ageing analysis of trade receivables due from third parties is as follows: 2013

2012

CNY million

CNY million

Not past due

43,903

37,430

Less than 90 days past due

10,698

11,960

90 days to 1 year past due

7,575

6,983

1 year and above past due

1,353

1,690

63,529

58,063

Less: Allowance for doubtful debts

(4,340)

(3,487)

Total

59,189

54,576

Consolidated Financial Statements Summary and Notes

93

(b) Impairment of trade receivables due from third parties Impairment losses in respect of trade receivables due from third parties are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against the trade receivables due from third parties directly (see note 1(l)). The movement in the allowance for doubtful debts in respect of trade receivables due from third parties during the year is as follows:

At January 1 Exchange adjustment Impairment loss recognised Collection of previously written-off debtors Uncollectible amounts written off At December 31

2013

2012

CNY million

CNY million

3,487

3,548

(520) 1,075 411 (113) 4,340

(63) 3,479 – (3,477) 3,487

19. Other receivables 2013

2012

CNY million

CNY million

Advance payments to suppliers

1,605

2,388

Withholding taxes receivable

4,620

4,797

Pledged deposits

1,805

1,832

228

1,340

6,193

5,457

14,451

15,814

14

407

14,437

15,407

14,451

15,814

Gross amount due from third-party customers for contract works Others

Non-current portion Current portion

94

Consolidated Financial Statements Summary and Notes

20. Cash and cash equivalents 2013

2012

CNY million

CNY million

5

15

Deposits with banks and other financial institutions

61,794

67,165

Highly liquid short-term investments

11,600

–

73,399

67,180

Cash in hand

Cash and cash equivalents in the consolidated statement of financial position and consolidated statement of cash flows

As at December 31, 2013, the Group had certain short-term investments purchased from commercial banks with maturity less than three months. These short-term investments were highly liquid, readily convertible into known amounts of cash and are subject to an insignificant risk of changes in value. These short-term investments were all subsequently matured and settled in January 2014. 21. Assets held for sale According to an agreement entered into by the Company and a third party, the Company committed to sell certain of its property, plant and equipment to the third party with a total consideration of CNY2,800 million. Pursuant to the agreement, the Company shall deliver the related property, plant and equipment to the third party before the end of March 2013. As a result, the related property, plant and equipment were classified as held for sale. The sale of the related property, plant and equipment was completed in two batches in the latter half of 2012 and the first half of 2013 with a net gain of CNY761 million and CNY986 million recognised, respectively. 22. Borrowings 2013

The carrying amount of the above loans and borrowings approximates to the fair value. Certain of the Group’s banking facilities are subject to the fulfillment of covenants relating to certain of the borrower’s statement of financial position ratios, as are commonly found in lending agreements with financial institutions. If the Group were to breach the covenants, the draw down facilities would become payable on demand. The Group regularly monitors its compliance with these covenants. As at December 31, 2013, none of the covenants relating to draw down facilities had been breached (2012: nil). Corporate bond On May 11, 2012, Proven Honour Capital Limited, a wholly-owned subsidiary of the Company, issued a corporate bond with a principal amount of CNY1,000 million and three years maturity at an annual interest rate of 5.30%. This corporate bond is fully guaranteed by the Company.

96

Consolidated Financial Statements Summary and Notes

23. Trade and bills payable 2013

2012

CNY million

CNY million

761

840

30,529

32,696

31,290

33,536

Trade payables Trade payables due to related parties Trade payables due to third parties

Bills payable Bank acceptance bills

378

1,794

Letter of credit payables

312

4,943

690

6,737

31,980

40,273

2013

2012

CNY million

CNY million

24. Other payables

634

1,174

12,694

8,661

– Staff related

17,820

14,414

– Supplies related

11,777

9,797

Other taxes payable

7,824

5,640

Purchase of property, plant and equipment

2,053

1,759

416

2,331

14,671

11,603

67,889

55,379

Interest payable Advances received Accrued expenses

Gross amount due to third-party customers for contract works Others

25. Construction contracts The aggregate amount of costs incurred plus recognised profits less recognised losses to date for the Group, included in the gross amount due from/to third-party customers for contract works as at December 31, 2013, is CNY8,067 million (2012: CNY26,723 million).

Consolidated Financial Statements Summary and Notes

97

26. Provisions and contingencies (a) Provisions 2013

2012

CNY million

CNY million

Provision for warranties

(i)

2,963

2,407

Other provisions

(ii)

2,537

1,828

5,500

4,235

Non-current portion Current portion

782

586

4,718

3,649

5,500

4,235

Movement in provisions during the year is as below:

At January 1, 2012

Provision for

Other

warranties

provisions

CNY million

CNY million

CNY million

1,962

1,842

3,804

Total

Provisions made during the year

2,844

1,384

4,228

Provisions utilised during the year

(2,399)

(1,398)

(3,797)

2,407

1,828

4,235

Provisions made during the year

3,491

1,332

4,823

Provisions utilised during the year

(2,935)

(623)

(3,558)

At December 31, 2013

2,963

2,537

5,500

At December 31, 2012 and January 1, 2013

(i) Provision for warranties The provision for warranties relates primarily to equipment sold during the year. The provision is determined based on estimates made from historical warranty data associated with similar products and services and anticipated rates of warranty claims for its products. The Group expects to settle the majority of the liability within the next twelve months. (ii) Other provisions Other provisions are mainly for onerous contracts and outstanding litigations and claims.

98

Consolidated Financial Statements Summary and Notes

(b) Contingencies i) In July 2011, InterDigital Corporation (“IDC”)

On February 4, 2013, the Shenzhen Intermediate

filed a complaint with the United States

People’s Court ruled that IDC had violated

International Trade Commission (the “USITC”

the PRC’s Anti-Monopoly Law and ordered

or “Commission”) and the United States District

IDC to compensate the Group for damages of

Court for the District of Delaware against

CNY20 million. The Court also ruled that the

Huawei Technologies Co., Ltd. (“Huawei

royalty rates licenses to Huawei Tech for IDC’s

Tech”) and Futurewei Technologies Inc.

Chinese essential standard patents in wireless

(“Futurewei”), both wholly-owned subsidiaries

communication should not exceed 0.019% of

of the Company. The complaint alleged that

the actual sales prices of Huawei Tech’s wireless

sales of imported 3G wireless devices by the

devices.

said subsidiaries within the United States had infringed IDC’s 3G wireless patents and

complaint against IDC in the PRC for violation of the fair, reasonable, and non-discriminatory

On June 28, 2013 and December 19, 2013,

(“FRAND”) policies and the PRC’s Anti-

the USITC ruled in favor of Huawei Tech,

Monopoly Law. In June 2012, Huawei Tech

Futurewei and USA Device in respect of the

filed another complaint with the European

first complaint in the initial determination and

Commission

the final determination, respectively.

(the

“EC”)

to

request

an

investigation into the licensing fees requested by IDC, which it deemed exploitative,

On December 23, 2013, Huawei Tech,

discriminatory, and in violation of the FRAND

Futurewei and USA Device reached a settlement

policies as well as the EC’s antitrust law.

agreement with IDC to withdraw or dismiss all the ongoing legal actions against each other.

On January 2, 2013, IDC filed another two

Under the settlement agreement, the parties

complaints with the USITC and the United

will solve their dispute through arbitration.

States District Court for the District of Delaware against Huawei Tech, Futurewei, and Huawei

At this stage, the Group is unable to predict

Device USA Inc. (“USA Device”), another

the outcome of the litigation, or reasonably

wholly-owned subsidiary of the Company. The

estimate a range of possible loss, if any, given

complaints further alleged that the sales of

the current preliminary status of the litigation.

certain 3G and 4G wireless devices sold by the said subsidiaries within the United States had infringed three of IDC’s other patents.

Consolidated Financial Statements Summary and Notes

99

ii) On May 23, 2012, Flashpoint Technology Inc.

to predict the outcome of the litigation, or

(“Flashpoint”) filed a complaint with the USITC,

reasonably estimate a range of possible loss, if

requesting the Commission to commence an

any, given the current status of this litigation.

investigation under Section 337 of the Tariff Act of 1930 into certain electronic imaging

iii) On July 24, 2012, Technology Properties

devices manufactured by four alleged infringing

Limited LLC (“TPL”) filed a complaint with

companies and their affiliates by reason of

the USITC, requesting the Commission to

patent infringement and requested for issuance

commence an investigation under Section 337

of an exclusion order and cease and desist

of the Tariff Act of 1930 into certain wireless

order in relation to the electronic imaging

consumer electronics devices and components

devices concerned. Huawei Tech and Futurewei

manufactured by thirteen companies and

were named as respondents. On August 2,

their affiliates by reason of alleged patent

2012, the Administrative Law Judge granted

infringement and requested for issuance of an

a joint motion to substitute Huawei Device

exclusion order and cease and desist order in

Co., Ltd. (“Huawei Device”) and USA Device

relation to the electronic products concerned.

for Huawei Tech and Futurewei. Flashpoint

Huawei Tech was named as one of the thirteen

also filed another complaint before the United

companies. On August 21, 2012, the USITC

States District Court for the District of Delaware

decided to institute Section 337 investigation in

for the same reason against Huawei Device and

relation to the electronic products concerned.

USA Device. The legal action before District

TPL also filed another complaint before the

Court of Delaware was stayed.

United States District Court for the Northern District of California for the same reason.

On September 30, 2013, the Administrative

On September 6, 2013, the Administrative

Law Judge of the USITC issued an initial

Law Judge of the USITC issued an initial

determination in respect of Flashpoint’s

determination that the Group did not infringe

complaint with USITC that Huawei Device

the asserted patent. On February 19, 2014,

and USA Device did not infringe the asserted

the USITC issued a final determination that the

patents. At this stage, the Group is unable

Group did not infringe the asserted patent.

100

Consolidated Financial Statements Summary and Notes

27. Operating leases (a) Leases as lessee As at December 31, 2013 and 2012, the total future minimum lease payments under non-cancellable operating leases are payable as follows: 2013

2012

CNY million

CNY million

Within 1 year

618

472

After 1 year but within 5 years

878

577

65

58

1,561

1,107

After 5 years

The Group leases a number of warehouses, factory facilities, office premises and staff apartments under operating leases. The leases typically run for an initial period of one to five years. None of the leases includes contingent rentals. During the year ended December 31, 2013, CNY2,392 million was recognised as an expense in the consolidated statement of profit or loss in respect of operating leases (2012: CNY2,334 million). (b) Leases as lessor The Group leases out certain of its properties under operating leases (see note 3 and note 9). As at December 31, 2013 and 2012, the Group’s total future minimum lease payments under non-cancellable operating leases are receivable as follows:

Within 1 year After 1 year but within 5 years

2013

2012

CNY million

CNY million

23

100

1

9

24

109

During the year ended December 31, 2013, CNY77 million was recognised as rental income in the consolidated statement of profit or loss (2012: CNY114 million).

Consolidated Financial Statements Summary and Notes

101

28. Capital commitments (a) Acquisition and construction of buildings Capital commitments of the Group in respect of acquisition and construction of buildings outstanding at December 31, 2013 and 2012 not provided for in the consolidated financial statements summary were as follows: 2013

2012

CNY million

CNY million

Contracted for

3,378

2,094

Authorised but not contracted for

2,945

4,376

6,323

6,470

(b) Other capital commitments Other contracted capital commitments outstanding at December 31, 2013 and 2012 not provided for in the consolidated financial statements summary were as follows:

Establishment of an associate

2013

2012

CNY million

CNY million

–

25

29. Group enterprises (a) Parent and ultimate controlling party The Group’s ultimate controlling party is the Union of Huawei Investment & Holding Co., Ltd.

Sale and maintenance of electrical equipment and mobile communication products

Consolidated Financial Statements Summary and Notes

(c) Acquisition of subsidiaries i) On August 6, 2013, Huawei Tech Investment, a wholly-owned subsidiary of the Company, acquired 100% equity interest in Caliopa NV (“Caliopa”) from third parties for a consideration of EUR7 million (equivalent to CNY56 million). Caliopa is located in Belgium and principally engaged in developing silicon photonics-based optical solutions in the telecommunication industry. In 2013, all of Caliopa’s services were provided to entities within the Group. ii) On December 10, 2013, Huawei Technologies (Australia) PTY Ltd., a wholly-owned subsidiary of the Company, acquired 100% equity interest in Fastwire PTY Limited (“Fastwire”) from a third party for a consideration of USD19 million (equivalent to CNY117 million). Fastwire is located in Sydney and provides Operation Supporting System services to telecommunication operators. In the period from the acquisition date to December 31, 2013, Fastwire contributed revenue of CNY1 million and net loss of CNY3 million to the Group’s results. If the acquisition had occurred on January 1, 2013, management estimate that consolidated revenue would have been increased by CNY30 million, and consolidated profit for the year would have been decreased by CNY9 million. In determining these amounts, management have assumed that the fair value adjustments that arose on the acquisition date would have been the same if the acquisition had occurred on January 1, 2013.

103

iii) On March 30, 2012, Huawei Tech Investment, a wholly-owned subsidiary of the Company, acquired the remaining 49% stake in Huawei Digital Technologies (Hong Kong) Co., Limited (formerly “Huawei Symantec Technologies Co., Ltd.”) (“Huawei Digital HK”) from Symantec Hardware Holding LLC (“Symantec Hardware”) for a consideration of USD530 million (equivalent to CNY3,337 million). As a result of this acquisition, the Group’s equity interest in Huawei Digital HK increased from 51% to 100% and Huawei Digital HK became a whollyowned subsidiary of Huawei Tech Investment, which in turn is a wholly-owned subsidiary of the Company. Huawei Digital HK is a Hong Kong-based joint venture established by Huawei Tech Investment and Symantec Hardware in 2008. Huawei Digital HK is principally engaged in research and development, production and sale of network storage and security products. In the period from the acquisition date to December 31, 2012, Huawei Digital HK contributed revenue of CNY3,225 million and net loss of CNY69 million to the Group’s results. If the acquisition had occurred on January 1, 2012, management estimate that consolidated revenue would have been increased by CNY4,289 million, and consolidated profit for the year would have been decreased by CNY375 million. In determining these amounts, management have assumed that the fair value adjustments that arose on the acquisition date would have been the same if the acquisition had occurred on January 1, 2012. iv) On March 31, 2012, Huawei Software Tech, a wholly-owned subsidiary of the Company, acquired the remaining 48% stake in Beijing

104

Consolidated Financial Statements Summary and Notes

Huawei Longshine from Longshine Information Technology Company Limited (“Longshine Information”) for a consideration of CNY116 million. As a result of this acquisition, the Group’s equity interest in Beijing Huawei Longshine increased from 52% to 100% and Beijing Huawei Longshine became a whollyowned subsidiary of the Company.

In the period from the acquisition date to December 31, 2012, Beijing Huawei Longshine contributed revenue of CNY130 million and profit of CNY13 million to the Group’s results. If the acquisition had occurred on January 1, 2012, management estimate that consolidated revenue would have been increased by CNY130 million, and consolidated profit for the year would have been decreased by CNY9 million. In determining these amounts, management have assumed that the fair value adjustments that arose on the acquisition date would have been the same if the acquisition had occurred on January 1, 2012.

Beijing Huawei Longshine is a China-based company established in 1996. Beijing Huawei Longshine is principally engaged in production and sale of network communication products, computer hardware and software and provision of related services.

The above acquisitions had the following effect on the Group’s assets and liabilities on the acquisition date: Recognised values on acquisition 2013 2012 Caliopa

Caliopa The goodwill is attributable mainly to the skills and technical talent of Caliopa’s work force. None of the goodwill recognised is expected to be deductible for tax purposes. Fastwire The goodwill is attributable mainly to the skills and technical talent of Fastwire’s work force, and the synergies expected to be achieved from integrating Fastwire into the Group’s existing network business. None of the goodwill recognised is expected to be deductible for tax purposes. 30. Comparative figures As a result of the application of new IFRSs and amendments to IFRSs and to conform to current year’s presentation, certain comparative figures have been adjusted to provide comparative amounts in respect of items disclosed for the first time in 2013. Further details of these developments are disclosed in note 2.

Risk Factors

106

Risk Factors

All risk factors mentioned in this Annual Report,

Huawei has incorporated risk management factors

particularly those outlined in this section, refer

into its strategic planning and business planning

to key future uncertainties that may affect

processes; through strategic planning, all domains

the company’s business objectives. They were

systematically identify and assess their risks. In

identified from the company’s strategic planning,

the 2013 business plan, all domains developed

business model, external environment, and

risk countermeasures, thereby giving managerial

financial system. Major risk factors are events that

priority to risk monitoring and reporting in daily

will significantly impact the company’s competition

operations. The company ensures the continuity of

landscape, reputation, financial conditions,

business operations by clarifying major risks during

operating results, and long-term prospects within

strategic decision making and planning, while also

the next 18 months. Hereinafter, all risk factors

preemptively controlling risks in business plans and

refer to major risk factors.

execution.

Huawei’s Risk Management System

Strategic Risks

Based

Sponsoring

Intense competition: The markets in which Huawei

Organizations of the Treadway Commission

operates are highly competitive in terms of product

(COSO) framework, in line with our organizational

price, functionality, and service quality, as well

structure and operating model, and by referring

as the timing of new product launch. The rapid

to the ISO31000 risk management standards,

development of science and technology, and

Huawei designed and established an enterprise risk

changes in alternative technologies or industry

management (ERM) system, issued corresponding

standards will lead to shorter product lifecycles

ERM policies and processes, and optimized our

and may attract more new entrants into the

ERM organizations and operating mechanism. The

markets in which we operate.

on

the

Committee

of

ERM system consists of three major roles: In this market context, we will remain committed ■

All business executives are responsible for risk management of their assigned business domains.

■

The Enterprise Risk Mgmt Dept assists the FC and coordinates all business executives in managing all major risks.

to thoroughly understanding, digging out, and satisfying diversified customer requirements. To secure and strengthen our competitive advantage and continuously improve our operating results, we will launch products and services of even higher quality to the market while reducing the total costs for our customers.

Risk Factors

External Risks

107

Natural disasters: Earthquakes, floods, and other natural disasters may impact the company’s supply

Economic environment: Many uncertainties and

chain operations, and slow down or even prevent

downside risks will persist in the global economy in

delivery in a certain region or even all regions.

the future. To improve financial conditions, telecom carriers may postpone investments or initiate other

Operational Risks

cost-cutting measures. These factors could result in reduced demand for network infrastructures

Supply continuity: Although Huawei strives to avoid

and services, which would in turn affect Huawei’s

procurement from single-source suppliers, it is not

operating results.

always possible due to objective factors. Finding an alternative supplier or redesigning products may

Country-specific risks: Huawei conducts business

be time-consuming and costly. As such, supply and

in more than 170 countries and regions. Operating

delivery of our products to our customers could

in these countries involves certain risks, such as

be seriously affected if any of our single-source

civil unrest, economic and political instability,

suppliers were unable to ensure continuous supply

imposition of exchange controls, sovereign debt

or met with product quality issues. To mitigate this

crisis, supervision over the right of operations, and

risk, we periodically assess and conduct audits on

labor issues. All these risks require Huawei to have

our suppliers, and preemptively initiate component

a high aptitude for risk management.

replacements or solution redesign.

Legal risks: In certain regions where we operate,

Rising labor costs: Increasing labor costs in China

the complex legal environments may pose various

may offset the company’s efforts to improve

adverse impacts although we strive to comply with

efficiency and ultimately affect our profitability.

all local laws and regulations. Information security and intellectual property Trade barriers: Today, as Huawei conducts business

right (IPR): While Huawei has judiciously adopted

around the world, the complex international

information security measures to protect our IPR,

economic and financial conditions along with

they may not be adequate to prevent infringement

increasingly fierce industry competition may

or improper use of our information, patents, or

challenge Huawei with different types of trade

licenses. Misappropriations of this nature will

barriers in some countries. Measures resulting in

cause losses to Huawei even though we may be

trade barriers have become more complicated and

protected to some extent by intellectual property

include trade investigations, the imposing of large

law.

amounts of anti-dumping and anti-subsidy duties, and setting special product quality and technical

Financial Risks

specifications. All of these measures may impact the free trade of Huawei products. Although we

In 2014, we will gradually restructure our business organizations in order to establish our innovative and technological advantages in the era of ICT convergence, and to provide solutions that can fully meet different customers’ needs, so as to deliver a superior user experience. In addition, we will build closer connections and partnerships with customers and help them achieve business success while ensuring healthy, sustainable, and effective growth for our company. Shareholders Huawei Investment & Holding Co., Ltd. (“the Company” or “Huawei”) is a private company wholly owned by its employees. Shareholders of Huawei are the Union of Huawei Investment & Holding Co., Ltd. (the “Union”) and Mr. Ren Zhengfei. Through the Union, the company implements an Employee Shareholding Scheme (the “Scheme”), which involved 84,187 employees as of December 31, 2013. The Scheme effectively aligns employee contributions with the company’s long-term development, fostering Huawei’s continued success. Mr. Ren Zhengfei is the individual shareholder of the Company and also participates in the Scheme. As of December 31, 2013, Mr. Ren’s investment accounts for nearly 1.4% of the Company’s total share capital.

Commission was elected in December 2010. At present, the Representatives are Ms. Sun Yafang,

and

the

company’s

governance

Ping, Mr. Tao Jingwen, Mr. Zhang Shunmao, Mr.

structure and organizing its optimization and

Ding Shaohua, Mr. Li Jin’ge, Mr. Wang Shengli,

deployment.

110

■

Corporate Governance Report

Deciding on the selection, appraisal, and compensation of the Chief Executive Officer;

In 2013, the attendance record for each Director is as follows:

approving the appointment and compensation Director

of other members of senior management. ■

Approving the corporate-level HR planning and

Meetings Attended

Ms. Sun Yafang

12

Mr. Guo Ping

12

In 2013, the BOD held 12 meetings. Throughout

Mr. Xu Zhijun

12

the year, the BOD reviewed and approved the

Mr. Hu Houkun

12

company’s medium-to-long-term business plan,

Mr. Ren Zhengfei

12

Mr. Xu Wenwei

12

Mr. Li Jie

12

accountability, and other major HR and financial

Mr. Ding Yun

12

policies and activities. In addition, the BOD

Ms. Meng Wanzhou

12

organized a training session for its members in

Ms. Chen Lifang

11

Mr. Wan Biao

7

Mr. Zhang Ping’an

12

Mr. Yu Chengdong

11

major HR policies.

the annual business plan and budget, revisions to the Articles of Association, operations of the committees of the BOD, organization building and

which they had in-depth discussions about training topics with external experts. On December 27, 2013, the Representatives elected four additional members to the BOD, increasing the number of BOD members from 13 to

Mr. Li Yingtao, Mr. Li Jin’ge, Ms. He Tingbo, and Mr. Wang Shengli were elected to the BOD on December 27, 2013, and did not attend BOD meetings in 2013.

The BOD has established the Executive Committee, which acts as the executive body of the BOD while the BOD is adjourned. Members of the Executive Committee include Mr. Guo Ping, Mr. Xu Zhijun, Mr. Hu Houkun, Mr. Xu Wenwei, Mr. Li Jie, Mr. Ding Yun, and Ms. Meng Wanzhou. In 2013, the Executive Committee of the BOD held 21 meetings.

Corporate Governance Report

Human Resources Committee

111

The Human Resources Committee meets on a monthly basis and convenes special sessions

The Human Resources Committee manages and

as needed. At the invitation of the committee,

improves the core elements of organizational

business executives and subject matter experts may

management such as organization, talent,

attend the meetings as non-voting participants.

incentives, and culture. Under the authorization

The Human Resources Committee held 12 meetings

of the BOD, this committee develops and decides

in 2013 to meet the requirements of the BOD, the

on key policies and transformation initiatives

global development needs of multiple business

related to HR management and oversees their

groups, and the challenges of managing diversified

implementation. To support business development,

talent.

the committee ensures that HR policies reflect the company’s HR management philosophy and

In 2013, the committee continued to conduct

core concepts while also considering the business

strategic planning regarding HR management.

characteristics and management models of

Focusing on the “Talent Pyramid” and its

departments at all levels.

solution architecture, the committee developed management

systems

for

managerial

and

The key roles and responsibilities of the Human

professional positions. To address the problems

Resources Committee include:

and needs related to incentive management, the committee optimized the company’s compensation

■

■

■

Managing the succession plans, allocation,

and incentive structure and ensured that it was

appointments or removals, performance

effectively implemented. To adapt to business

appraisals, compensation, and incentives for key

development needs, the committee restructured

managers and talent under the authorization of

relevant organizations and continued to solidify

the BOD.

the flexible governance mechanism for headcount

Managing overall incentive policies, benefit

budgeting that aligns with business needs. The

policies, the compensation structure, and job

committee continuously carried out major tasks

matching.

related to employee disciplinary compliance. In

Managing

policies

for

organizational

addition, the committee made expected progress

development and optimization; managing the

in areas such as development of HR management

HR budget and staffing for each budgetary

frameworks and policies and supervision of the

unit.

implementation of key decisions and policies.

■

Managing employee learning and development

■

Setting policies related to employee disciplinary

the company’s major HR policies issued in recent

compliance and managing disciplinary actions

years, the Human Resources Committee held the

in the case of major violations.

2013 Huawei Annual Management Conference.

policies and providing guidance.

■

■

To help managers at all levels better understand

Setting policies related to the occupational

At the conference, in-depth discussions about

health and safety of employees and providing

corporate vision and major directions and policies

guidance.

regarding talent and incentive management were

Managing strategic HR plans and key HR transformation initiatives.

conducted, and consensus was reached. The discussions facilitated the effective implementation of corporate policies in organizations at all levels.

Corporate Governance Report

112

The Human Resources Committee is comprised

■

of 15 members, including BOD members, senior

proposals for major financing activities, the

business executives, and senior HR experts. The Chairman of the committee is Mr. Hu Houkun. The

the logistics service base of the Shenzhen South Sea Oil Corporation. As he was dissatisfied with his job, he decided to establish Huawei with a capital of CNY21,000 in 1987. He became the CEO of Huawei in 1988 and has held the title ever since. Mr. Xu Wenwei (William Xu)

Ms. Chen Lifang Born in 1971, Ms. Chen graduated from Northwest University in China. Ms. Chen joined Huawei in 1995 and has served as Chief Representative of the Beijing Representative Office, Vice President of the International Marketing Dept, Deputy Director

Born in 1963, Mr. Xu holds a master’s degree from

of the Domestic Marketing Management Office,

Southeast University. Mr. Xu joined Huawei in 1991

President of the Public Affairs and Communications

and has served as President of the International

Dept, and Corporate Senior Vice President.

Technical Sales & Marketing Dept, President of the European Area, Chief Strategy & Marketing Officer, Chief Sales & Service Officer, President of the Joint Committee of Regions, CEO of the Enterprise BG, and President of the company’s Strategy Marketing Dept. Mr. Li Jie (Jason Li) Born in 1967, Mr. Li holds a master’s degree from

Mr. Wan Biao Born in 1972, Mr. Wan holds a bachelor’s degree from the University of Science and Technology of China. Mr. Wan joined Huawei in 1996 and has served as Director for the UMTS RAN System, President of the UMTS Product Line, President of the Wireless Product Line, CEO of Huawei Device, and President of the Russia Region.

Xi’an Jiaotong University. Mr. Li joined Huawei in 1992 and has served as Regional President, President of the Global Technical Service Dept, President of the Human Resource Mgmt Dept, and President of the Joint Committee of Regions. Mr. Ding Yun (Ryan Ding)

Mr. Zhang Ping’an (Alex Zhang) Born in 1972, Mr. Zhang holds a master’s degree from Zhejiang University. Mr. Zhang joined Huawei in 1996 and has served as Product Line President, Senior Vice President, Vice President of Strategy & Marketing, Regional Vice President, Vice President

Born in 1969, Mr. Ding holds a master’s degree

of the Global Technical Service Dept, CEO of

from Southeast University. Mr. Ding joined Huawei

Huawei Symantec, COO of the Enterprise BG, and

in 1996 and has served as Product Line President,

currently, President of the Carrier Software & Core

President of the Global Solution Sales Dept,

Network Business Unit.

President of the Global Marketing Dept, Chief Products & Solutions Officer, and CEO of the Carrier Network BG.

Corporate Governance Report

119

Mr. Yu Chengdong (Richard Yu)

Ms. He Tingbo (Teresa He)

Born in 1969, Mr. Yu holds a master’s degree

Born in 1969, Ms. He holds a master’s degree from

from Tsinghua University. Mr. Yu joined Huawei in

Beijing University of Posts and Telecommunications.

1993 and has served as 3G Product Director, Vice

She joined Huawei in 1996 and has since served as

President of the Wireless Technical Sales Dept,

Principal ASIC Engineer, R&D Director of HiSilicon,

President of the Wireless Product Line, President

President of HiSilicon, Vice President of the 2012

of the European Area, Chief Strategy & Marketing

Laboratories, and member of the Human Resources

Officer, Chairman of Huawei Device, and CEO of

Committee.

the Consumer BG. Mr. Wang Shengli (Victor Wang) Mr. Li Yingtao

Born in 1963, Mr. Wang holds a master’s degree

Born in 1969, Mr. Li holds a doctorate degree

from Wuhan University. He joined Huawei in 1997

from Harbin Institute of Technology. Mr. Li joined

and served as Regional Vice President, Regional

Huawei in 1997 and has served as Chief of the

President, and President of the Asia Pacific Region.

Sweden Research Center, Director of the Product

He is now President of the European Region,

Mgmt Dept of Wireless Marketing, Director

executive member of the Management Team of

of the Research Dept of Products & Solutions,

the Joint Committee of Regions, Director of the

Director of the General Technology Office of

overseas subsidiaries’ Board Bureau, and Chairman

Products & Solutions, President of the Central

of the Board of Huawei Technologies Cooperatief,

Research & Development Unit, President of the

U.A.

2012 Laboratories, Director of the Integrated Technology Management Team, member of the Human Resources Committee, and member of the SDC. Mr. Li Jin’ge Born in 1968, Mr. Li holds a bachelor’s degree from Beijing University of Posts and Telecommunications. Mr. Li joined Huawei in 1992 and has served as Regional Vice President, Regional President, President of the Global Technical Sales Dept, President of the Sub-Sahara Area, member of the Joint Committee of Regions, member of the Finance Committee, and President of the Asia Pacific Area.

Supervisory Board Member Biographies Mr. Liang Hua (Howard Liang) Born in 1964, Mr. Liang holds a doctorate degree from Wuhan University of Technology. Mr. Liang joined Huawei in 1995 and has served as President of Supply Chain, CFO of Huawei, President of the Business Process & IT Mgmt Dept, President of the Global Technical Service Dept, and Chairman of the Audit Committee. Mr. Peng Zhiping (Benjamin Peng) Born in 1967, Mr. Peng holds a master’s degree from Fudan University. Mr. Peng joined Huawei in 1996 and has served as President of the Terminal Product Line, President of the Optical Network Product Line, President of the Supply Chain Mgmt Dept, President of the Procurement Qualification Mgmt Dept, Chief Operations & Delivery Officer, President of the Integrated Business Services (IBS), and Chief Supply Chain Officer. Mr. Ren Shulu (Steven Ren) Born in 1956, Mr. Ren holds a bachelor’s degree from Yunnan University. Mr. Ren joined Huawei in 1992 and has served as President of Shenzhen Smartcom Business Co., Limited, Chairman of the Capital Construction Investment Management

Committee, and currently, President of the Internal Service Mgmt Dept. Mr. Tian Feng Born in 1969, Mr. Tian holds a bachelor’s degree from Xidian University. Mr. Tian joined Huawei in 1995 and has served as EVP of the Middle East and Northern Africa Area, President of the Middle East Region, President of the China Region, CEO of Huawei Agisson, Vice President (acting) of the Human Resource Mgmt Dept, EVP of Huawei University, Director of the Institute of Education of Huawei University, Director of the Disciplinary and Supervisory Sub-committee of the Human Resources Committee, and executive member of the Management Team of the Joint Committee of Regions. Mr. Deng Biao (Alex Deng) Born in 1971, Mr. Deng holds a bachelor’s degree from Jiangxi University. Mr. Deng joined Huawei in 1996 and has served as President of the Access Network Product Line, President of the Network Product Line, President of the Carrier Software & Core Network Business Unit, and President of the Business Process & IT Mgmt Dept.

Corporate Governance Report

121

Committee Member Biographies Only the biographies of committee members not listed in “Director Biographies” or “Supervisory Board Member Biographies” are included in this section. (The order in which the biographies are provided is based on the number of strokes needed to complete the Chinese character that corresponds to the member’s surname.) Mr. Wang Shengqing (Ken Wang)

Mr. Zou Zhilei

Born in 1972, Mr. Wang holds a master’s degree

Born in 1971, Mr. Zou holds a bachelor’s degree

from Huazhong University of Science and

from Hefei University of Technology. Mr. Zou

Technology. Mr. Wang joined Huawei in 1997

joined Huawei in 1998 and has served as

and has served as Deputy Director of the Mobile

General Manager of the Xi’an Representative

Technical Sales Dept in China, Deputy Director

Office, General Manager of the Guangzhou

(acting) of the Technical Sales Dept in the Asia

Representative Office, President of the Northern

Pacific Area, Deputy General Manager of the

Africa Region, President of the Global Sales Dept

Indonesia Representative Office, Director of the

under the Enterprise BG, President of the Global

Telefonica Account Dept, and President of the

Sales and Service Dept under the Enterprise BG,

Marketing & Solution Dept.

and currently, EVP of the Carrier BG and member of the Finance Committee.

Mr. Fang Weiyi Born in 1965, Mr. Fang holds a master’s degree

Mr. CT Johnson, CPA

from the Aeronautics Computing Technique

Born in 1968, Mr. Johnson received an MBA in

Research Institute. Mr. Fang joined Huawei in

Finance and a Master of Science in Accounting at

1995 and has served as an engineer, Director of

the University of Texas at Dallas. He worked as an

the Intelligent Network Product Line, Director

Auditor with Ernst & Young starting in 1993 (US,

of the Strategy and Planning Dept, President of

Russia), as Finance Director for InBev from 1998

the Finance Mgmt Dept, President of the Sales &

(Russia) and then as a turn around CFO for multiple

Delivery Finance Mgmt Dept, and currently, CFO

companies starting in 2000 (US, Germany). He

of the Carrier Network BG and member of the

joined Ericsson in 2006 as the Controller for

Finance Committee.

the North America Region, later becoming the head of their Hosted Services Business, and finally

Mr. Li Shanlin

taking over as head of Commercial Management.

Born in 1968, Mr. Li holds a master’s degree from

In 2012, Mr. Johnson joined Huawei and served

Beijing University of Aeronautics and Astronautics.

as Corporate Controller in the Group Finance

Mr. Li joined Huawei in 1996 and has served as

Mgmt Dept, and is now Director of the Contract

an R&D project manager, Department Manager at

Commerce and Fulfillment Mgmt Dept and member

Huawei Technologies India Private Limited, Deputy

of the Finance Committee.

Chief of the Beijing Research Center, Director of the R&D Dept of the Data Communications Product Line, Deputy Director of the HR Branch of Products & Solutions, Vice President of the Human Resource Mgmt Dept, and member of the Human Resources Committee.

122

Corporate Governance Report

Mr. Zhang Shunmao (Patrick Zhang)

Mr. Zha Jun

Born in 1966, Mr. Zhang holds a master’s degree

Born in 1971, Mr. Zha holds a master’s degree

from Fudan University. Mr. Zhang joined Huawei

from Zhejiang University. Mr. Zha joined Huawei in

in 1992 and has served as Director of the Switch

1997 and has served as an R&D product manager,

Business Dept of the Central Research Dept, Vice

Director of the IMS Product Line, President of

President of the Technical Support Dept, Corporate

the Router and Network Security Product Line,

Senior Vice President, EVP of the Marketing Dept,

President of the Network Product Line, President

President of the Fixed Network Product Line,

of the Fixed Network Business Unit, member of

President of the Wireless Product Line, EVP of the

the Human Resources Committee, and member

Latin America Area, President of the Northern Latin

of the SDC.

America Region, and President of the Enterprise Business Marketing & Solutions Dept.

Mr. Yao Fuhai Born in 1968, Mr. Yao holds a bachelor’s degree

Mr. Yi Xiang (Steven Yi)

from the University of Electronic Science and

Born in 1975, Mr. Yi holds a bachelor’s degree

Technology of China. Mr. Yao joined Huawei in

from Wuhan University. Mr. Yi joined Huawei in

1997 and has served as Director of the Pricing

1998 and has served as Director of the Sales Mgmt

Center, Vice President of the Business Process

Dept in the Asia Pacific Area, General Manager of

& IT Mgmt Dept, Vice President of the Strategy

the Pakistan Representative Office, President of the

Cooperation Dept, Vice President of the Global

Middle East Region, President of the Middle East

Technical Sales Dept, President of the Global

and Africa Area, and currently, President of the

Technical Service Dept, and currently, President

Sales & Delivery Finance Mgmt Dept, Deputy CFO

of the Procurement Qualification Mgmt Dept,

of Huawei, and member of the Finance Committee.

Director of the Group Procurement Management Committee,

Mr. Zhou Daiqi

and

member

of

the

Finance

Committee.

Born in 1947, Mr. Zhou graduated from Xidian University. Mr. Zhou joined Huawei in 1994 and

Mr. Peng Bo (Vincent Peng)

has served as an ATM product manager, Chief

Born in 1976, Mr. Peng holds a bachelor’s degree

Engineer and General Manager at the Multimedia

from Harbin Institute of Technology. Mr. Peng

Dept, Director of the Hardware Dept, Chief of the

joined Huawei in 1999 and has served as Account

Xi’an Research Center, Director of the HR Branch

Manager of the Customer Relationship Mgmt

of Products & Solutions, and currently, Chief Ethics

Dept, Account Manager of the Hong Kong

& Compliance Officer, Director of the Corporate

Representative Office, President of the Vodafone

Committee of Ethics and Compliance, and member

Account Dept, Vice President of the Western

of the Audit Committee.

European Region, President of the Accounts Business Dept, President of the Global Sales Dept under the Carrier Network BG, member of the Carrier Network BG EMT, member of the Human Resources Committee, and member of the SDC.

Corporate Governance Report

Mr. Peng Zhijun (Peter Peng) Born in 1969, Mr. Peng holds a master’s degree from Shanghai University of Finance and Economics. Mr. Peng joined Huawei in 1997 and has served as Director of the Investment Mgmt Dept, CFO of the Latin America Area, Director of the Tax Mgmt Dept, Vice President of the Finance Mgmt Dept, Deputy Director of the Business Control and Enterprise Risk Mgmt Dept, and currently, Chief Risk Review Officer and member of the Audit Committee.

123

Independent Auditor An independent auditor is responsible for auditing a company’s annual financial statements. In accordance with applicable accounting standards and audit procedures, the independent auditor expresses an opinion as to whether the financial statements are true and fair. The scope of the financial audit and the annual audit results are subject to review by the Audit Committee. Any relationship or service that may

Mr. Hui Chun (Clark Hui)

potentially affect the objectivity and independence

Born in 1963, Mr. Hui holds a master’s degree from Huazhong University of Science and Technology. Mr. Hui joined Huawei in 1989 and has served as President of the Procurement Qualification Mgmt Dept, Vice President of Finance & President of the Business Control Dept, Vice President of the

of the independent auditor can be discussed with

Business Process & IT Mgmt Dept, and currently, Director of the Engineering Inspection Dept and member of the Audit Committee.

KPMG has been Huawei’s independent auditor

Mr. Qiao Nengdong (Joe Qiao) Born in 1973, Mr. Qiao holds a master’s degree from Nankai University. Mr. Qiao joined Huawei in 1998 and has served as Vice President of the Accounting Mgmt Dept, CFO of the Northern Africa Region, CFO of the Enterprise BG, and currently, Director of the General Procurement Qualification Dept and member of the Finance Committee. Mr. Xiong Lening Born in 1969, Mr. Xiong holds a bachelor’s degree from Zhejiang University. Mr. Xiong joined Huawei in 1993 and has served as Deputy Director of the Development and Pilot (D&P) Dept, General Manager of the Chengdu Representative Office, Director of the Beijing Branch, Director of the China Mobile Account Dept, Vice President of the China Region, EVP (acting) of the Russia Region, and currently, President of the Supply Chain Mgmt Dept and member of the Finance Committee.

the Audit Committee. The independent auditor may discuss any issues identified or any difficulties encountered during the course of the financial audits with the Audit Committee.

since 2000. Business Structure The company has established three BGs. Each BG is a responsibility center for the end-to-end operations in a particular customer domain. BGs are the main driving force behind Huawei’s operations. Each BG is responsible for ensuring effective growth and improving efficiency for the company as well as achieving business objectives and ensuring customer satisfaction for its business domain. Service BGs (SBGs) are responsibility centers that provide end-to-end support and services for BGs. SBGs shall continuously increase efficiency and reduce operating costs. The Group Functions provide BGs with support, services, and supervision. They are positioned to offer accurate, timely, and effective services to field offices and strengthen supervision while delegating sufficient authority to field offices. In 2014, we will gradually restructure our organization.

124

Corporate Governance Report

Continuous Improvement of Management

and other business domains. Besides this, we

Systems

streamlined our processes end-to-end. We employed the Six Sigma methodology to enhance

Huawei established global management systems

the ability of all employees to improve. We also

to promote and pass down our corporate culture

promoted continuous improvements through

while achieving effective business management.

quality measurements, reviews, and assessments in

The aim is to:

accordance with the best practices of the industry.

■

Advocate customer centricity and further enable customer success.

■

Ensure risks are controlled and business continuity is guaranteed.

■

To ensure that the products and services we provide to our customers are effective and reliable, we had our systems certified by multiple independent third parties. Additionally, Huawei

operational efficiency and help achieve business objectives. In addition, GPOs perform Semi-

The company has established an internal complaint

Annual Control Assessments (SACAs) to assess

channel, an investigation mechanism, and an

the effectiveness of the overall process design and

accountability system. We have clearly defined

execution effectiveness of each business unit, and

guidelines in the Agreement on Honesty and

then report the results to the Audit Committee.

Integrity, which stipulates that suppliers can report any improper conduct concerning Huawei

Information & Communication

employees through the channels provided in the agreement. The Internal Audit Dept independently

The

information

assesses the effectiveness of the company’s

and communication channels to ensure timely

company

internal controls and investigates any suspected

acquisition

of

has

established

from

violations of the BCG. The Internal Audit Dept

customers, suppliers, and other parties. Huawei

external

information

reports the audit and investigation results to the

has created formal channels for transferring

Audit Committee and senior management. Huawei

internal information. Huawei has also established

has established and implemented a mechanism

an online forum that provides a channel for

for internal control appraisal, accountability, and

employees to communicate freely with each other.

impeachment of GPOs and regional managers.

Corporate management holds regular meetings

The Audit Committee and the CFO of Huawei

with departments at all levels to effectively pass

regularly review the effectiveness of the company’s

on management orientation and ensure that

internal controls and receive reports on action

management decisions are effectively implemented.

plans for internal controls and the progress of plan

All business policies and processes are available on

execution. Both have the right to request that the

the company’s intranet. Managers and process

GPOs or top management of each business unit

owners regularly organize training programs on

provide explanations for identified internal control

business processes and internal controls to ensure

issues and, if necessary, take corrective actions.

that all the up-to-date information is available

The Audit Committee and the CFO of Huawei may

to all employees. The company has established

also suggest that the Human Resources Committee

a mechanism for process owners at all levels to

take disciplinary action or propose impeachment

regularly communicate with one another, review

when necessary.

the execution effectiveness of internal controls, and follow up on resolving internal control issues.

Sustainable Development

129

Sustainable Development

In 2013, we redoubled our efforts to manage our sustainability initiatives. We have incorporated sustainability requirements into our business activities and have built sustainability into our operations, making sustainability an integral part of the day-to-day work for every Huawei employee. We continued to focus on our four sustainability strategies: bridging the digital divide, supporting stable and secure network operations, promoting environmental protection, and seeking win-win development. Our goal is to ensure harmony in the economy, environment, and society. Bridging the Digital Divide Communications for All Resolving Communications Challenges for 8 Million People in Remote Areas of the “Mountain Kingdom” Located in the Himalayas, Nepal is known as the “Mountain Kingdom” as it has many mountains with elevations of over 6000 km above sea level. Nepal’s mountainous terrain makes transportation in this developing country rather difficult. In the country, goods are mainly carried by manual labor, oxen, or helicopters. Electricity supply is another major challenge for the country. Every winter, some areas of the country suffer from power outages of up to 16 hours every day. Carriers in Nepal have long been troubled by such issues

The Huawei SingleSite solution makes

as difficult construction of common base stations, long

communications convenient for

construction periods, and high construction costs, and

Nepalese in mountainous areas

thus have been unable to more effectively promote local communications. People in Nepal could not even make smooth calls, let alone communicating with the outside world. After gaining a deep understanding of the conditions in Nepal, Huawei helped local carriers deploy integrated base stations in rural areas using the Huawei SingleSite solution. The deployment of energy-efficient outdoor base stations powered by solar energy significantly helped carriers lower their site construction costs, effectively reduced the dependency of base stations on electric power, and quickly achieved signal coverage in the relevant areas. By the end of 2013, Huawei rolled out 2G networks in mid-west, western, and far west Nepal, the country’s three remote mountainous areas, providing coverage for over 8 million people. Convenient communications have made the lives of the Nepalese much easier.

As part of our efforts to bridge the digital divide, Huawei is committed to providing people across all geographic areas with easy access to basic voice communications services. Our products and solutions have been deployed in more than 170 countries and regions, including a large number of underdeveloped countries and regions.

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Sustainable Development

Broadband Inclusion for All Providing High-Speed Broadband Access for More Africans According to analysis by the International Telecom Union (ITU), only 6.7% of African homes had access to broadband connections by 2013. In Europe, this figure reached up to 77%. African users are eager to gain access to the Internet. What they need is fast, reliable, and affordable broadband services. Given that Africa has rigid demands for broadband access but lacks fixed network resources, wireless broadband becomes especially important for bridging the digital divide in Africa. With its ultra-high downlink bandwidth and industry chain maturity, Huawei’s TD-LTE solution effectively improves the

penetration of broadband access in Africa while reducing the cost of wireless broadband access. In the past, broadband access was a luxury that could be afforded only by wealthy individuals and enterprises in Africa. Now, Huawei’s TD-LTE solution has changed broadband access from a luxury to a basic ICT service accessible to ordinary people in Africa. Wireless broadband is developing rapidly, playing an increasingly important role in reducing the number of Africans who lack internet connections. More and more Africans have gained access to high-speed broadband services and benefited from the efficiency and convenience of the information society.

Huawei enables broadband inclusion for all, ensuring that broadband is available everywhere. As an active member of broadband projects in different regions, Huawei seeks to bridge the broadband divide around the globe. In addition, Huawei enthusiastically promotes future-proof ICT technologies to improve people’s livelihoods and provide local communities with easy access to the information society.

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Nurturing ICT Talent Telecom Seeds for the Future Program The Telecom Seeds for the Future Program offers hands-on ICT training, scholarships, work experience, and internships to students from different countries. By the end of 2013, the Program had been extended to benefit more than 10,000 students from over 70 universities in more than 20 countries, including Australia, France, Germany, Ghana, Indonesia, Kenya, Morocco, Norway, and Spain.

Students are participating in hands-on ICT training

As issues surrounding broadband access are gradually resolved, the task of nurturing digitally literate ICT professionals has moved up our agenda. As of the end of 2013, Huawei had established 45 global training centers to nurture professionals for local communities and transfer knowledge to them. In close collaboration with local higher education institutes and other organizations, Huawei offers scholarships and internships to excellent students in order to support ICT education and nurture talent.

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Application of ICT Technologies Providing Aid for Visually Impaired Students Visually impaired students find it challenging to switch between computers because they can hardly detect the differences of different computers and desktops. Huawei virtual desktop technology takes the needs of the visually impaired students into consideration and allows for customization based on the needs of individual students. As a result, students have no difficulty using different devices, and can easily log in to a familiar graphical user interface (GUI) from any device.

Visually impaired students learn with Huawei’s Desktop Cloud

In March 2013, Huawei successfully completed the installation of 80 classroom ports for the Shanghai School for the Blind. The Huawei Desktop Cloud system provides students with quick and easy access to connectivity and an improved learning experience. A high school student surnamed Pan said, “The cloud desktop system gives us the chance to log in to the desktop easily in different classrooms, and seamlessly connect with our tablets and mobile phones, which makes learning easier.”

Huawei actively promotes the application of ICT technologies for consumers, governments, the public sector, and industries such as transportation and energy. Our customized ICT solutions help different geographic areas and groups use ICT technologies to increase their economic status, work efficiency, and competitiveness.

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Supporting Stable and Secure Network Operations Network Stability Supporting Network Stability in Response to the Ya’an Earthquake On April 20, 2013, a magnitude 7.0 earthquake hit Ya’an, Sichuan Province, creating widespread destruction and a wave of more than 4,000 aftershocks. Electricity and water supplies were cut off, roads were blocked, and critical telecommunication lines and wireless base stations were destroyed, affecting thousands of people. Bad weather, powerful aftershocks, and landslides proved ongoing challenges to the effort to restore communications. Huawei staff is working on the frontline in Ya’an In the wake of the earthquake, Huawei quickly initiated an emergency plan, established an emergency command center in Ya’an to coordinate local efforts, and worked alongside carriers, government agencies, subcontractors, and relief workers to carry out rescue efforts. In spite of the danger posed from numerous aftershocks, possibility of building collapse, and landslides, Huawei employees courageously went to such severely stricken areas as Baoxing and Lushan immediately after the disasters occurred to collaborate with local carriers in providing communications for rescue and relief efforts. Huawei designated more than 400 employees to disaster-stricken areas to restore equipment. All Huawei communications equipment was recovered by midday on April 26. Through dedication and collaboration with related parties, we quickly restored communications for local communities and provided effective support for relief efforts.

In 2013, Huawei ensured smooth communications for nearly 3 billion people worldwide and supported the stable operations of over 1,500 networks for more than 600 customers in over 170 countries and regions. We spared no effort in guaranteeing network availability during 181 critical events, natural disasters (including the Ya’an earthquake and Typhoon Haiyan in the Philippines), and special occasions (such as Hajj).

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Cyber Security Huawei's Cyber Security White Paper In 2013, Huawei released the second version of our cyber security white paper, Cyber Security Perspectives: Making cyber security a part of a company’s DNA – A set of integrated processes, policies and standards. In the white paper, Huawei discussed ways to make cyber security a part of our DNA, and called for the development and implementation of consistent international cyber security standards. “We confirm our company’s unswerving commitment to continuing to work with all stakeholders to enhance our capability and effectiveness in designing, developing, and deploying secure technology.” —— Chairman of the Huawei Global Cyber Security Committee

网络安全透视 构筑公司的网络安全基因 —— 一套综合流程、政策与标准 约翰 萨福克 ●

高级副总裁 | 全球网络安全官 华为技术有限公司

2013年10月

Huawei’s cyber security white paper

Cyber security assurance has been one of Huawei’s core strategies. It has long been an area of focus of our company. In 2013, we comprehensively incorporated cyber security requirements into our corporate policies and business processes in 12 domains, such as strategy & governance, laws & regulations, personnel management, R&D, and verification. We have developed and implemented an end-to-end global cyber security assurance system. Promoting Environmental Protection Green Pipe 20,000 Base Stations Powered by Natural Resources Normal base stations are usually powered by diesel generators. This not only generates carbon dioxide and other hazardous emissions; it also requires carriers to regularly refuel base stations and designate skilled workers for maintenance, resulting in extra travel and maintenance expenditures. Base stations powered by renewable energy have low operation costs, conserve energy, and are environmentally friendly. Renewable energy is therefore an ideal power supply solution for base stations.

Solar-powered base stations in Inner Mongolia, China

Huawei has deployed approximately 20,000 green base stations worldwide. Wind and solar energy can be leveraged to supply most of the power used by these base stations, saving 80% of fuel consumption. This helps carriers reduce carbon dioxide emissions during network expansions and lower their operational expenditures.

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Huawei emphasizes green concepts in the entire product lifecycle, including design, R&D, manufacturing, delivery, and service. We make continuous innovations in our technology, aiming to increase the resource utilization efficiency of our products. We also provide customers with world-leading products and solutions that are highly energy efficient and environmentally friendly, helping customers reduce their operational expenditures and decrease their carbon emissions. Green Operations Reducing Carbon Footprints with Solar Power Stations In recent years, Huawei has actively researched and utilized new energy solutions to help reduce the carbon footprints of our products while reducing our operational expenditures. In particular, the solar power stations used at Huawei’s Dongguan Campus generated 3.5 million kWh of power in 2013, which is equivalent to a 3,228 ton reduction in carbon dioxide emissions. In addition, Huawei plans to build solar power station projects at other Huawei campuses, including

Solar power stations at Huawei’s Dongguan Campus

Shenzhen, Hangzhou, and Nanjing. Once these stations are put into use, they will generate more power for Huawei’s operations. This, in turn, will help the company achieve the goal of reducing carbon dioxide emissions and contribute to the building of a low-carbon society.

Huawei not only actively responds to climate change, but also takes concrete measures to increase the efficiency of energy utilization, reduce greenhouse gas emissions, and build ourselves as a role model of environmentally-friendly operations. By strengthening our energy management and leveraging our management and technological approaches to energy conservation, Huawei saved 41.98 million kWh of electricity in 2013, which is equivalent to a 38,000 ton reduction in carbon dioxide emissions.

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Green Partner Huawei Green Partner Certification The Huawei Green Partner (HW GP) Program aims to encourage our suppliers to systematically manage their environmental protection efforts and pay attention to green initiatives throughout product lifecycles, ranging from “green” design to “green” manufacturing. By controlling the use of prohibited materials from sources, we strive to establish a green supply chain. In 2013, Huawei upgraded the HW GP standards to GP2.0 by adding the requirements for the

HW GP award ceremony

environment management system as well as energy and greenhouse gas management. In 2013, 34 suppliers passed our HW GP certification.

Huawei makes every effort to ensure that our products meet environmental protection requirements, and that our partners operate in compliance with environmental protection laws and regulations. During supplier qualification, selection, performance management, and material selection, we clarify environmental protection requirements for suppliers and their materials. By enforcing clear requirements for our suppliers to adopt better approaches to energy conservation and emissions reduction, we play an active role in promoting carbon emissions reduction and environmental protection in the industry chain. Green World Huawei SmartExchange Program Contributes to Circular Economic Growth The Huawei SmartExchange Program encourages consumers to trade in old mobile phones for recycling or reuse, in exchange for a discounted new smartphone. As a result, this Program reduces e-waste and encourages environmentally responsible consumer behavior. In 2013, Huawei developed the SmartExchange platform in France and collected 300 used mobile phones through a pilot program. We ensured that no phone ended up in a landfill, and reduced the

SmartExchange platform

equivalent of 13 tons of carbon dioxide emissions. In 2014, we plan to continue to work with our partners to expand the reach, visibility, and benefits of this initiative. The SmartExchange Program is expected to further reduce e-waste and give a strong impetus to circular economic growth.

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A wide variety of our green integrated ICT solutions enable industries to conserve energy and reduce emissions. As such, Huawei is an active player in promoting an energy-conserving, environmentallyfriendly, and low-carbon society. Seeking Win-Win Development Caring for Employees Making Employees Happier At Huawei, we advocate the motto of “work hard, play hard”. Apart from emphasizing good work performance and helping employees increase individual capabilities by providing them with broad development platforms, Huawei also strives to increase employee happiness and help them achieve a work-life balance. In 2013, Huawei championed a variety of activities to help employees experience the pleasure of being part of our “big family”, remain mentally and physically

A variety of activities for employees

healthy, and have a fulfilling life outside of work. These activities include “Family Day,” “3+1” (make a friend, join in a sports activity, take up a hobby, and read a thought-provoking book), and “Looking for Huawei Health-Conscious Employees”.

Huawei considers our employees to be our most valuable assets and the key to retaining our competitiveness and leadership position in the long run. Employee health, safety, and benefits are at the top of our mind. We provide reasonable and timely rewards to dedicated employees. Also, we give employees access to broad platforms where they can realize their individual value.

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Social Charity An Overview of Huawei’s Major Social Charity Activities in 2013 France – Launched the SmartExchange program to promote mobile recycling – Partnered with the Institute of Civil Service to support young people Spain – Launched the SmartBus program to promote the responsible use of ICT United Kingdom – Supported the Prince's Trust Foundation Portugal – Launched the SmartBus program to promote the responsible use of ICT US – Supported the K to College non-profit organization

Hungary – Supported top ICT students through the Huawei Innovative Leaders of Tomorrow Scholarship Belgium – Launched the InnoApps Challenge to foster youth entrepreneurship Turkey – Supported the region of Van in cooperation with the Ministry of Education, Turkcell and Turkey Education Association (TEV) for post-disaster relief

China – Guaranteed to stable communication in Ya'an after the 2013 earthquake and donated 3000 handsets to the quakestricken area – L aunched social charitable activities to donate books to children in remote areas, helping them realize their dreams

India – Supported students enrolled in Chinese universities through the Huawei Maitree Scholarship Program Philippines – Implemented the Instant Network with Vodafone Foundation in disaster-stricken areas following Typhoon Haiyan

Japan – Supported the Charity Relay Run to support community activities in the disaster areas of Tohoku United Arab Emirates – Supported a charity marathon to raise awareness about education

Australia – Supported the Children’s Hospital to train nurses – Supported the Tour de Cure Foundation to fight against cancer

Singapore – Launched a GPON Training Centre as part of Telecom Seeds for the Future

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At Huawei, our social charity activities are designed to attain four goals: bridging the digital divide, creating opportunities through education, promoting environmental initiatives, and contributing to the communities where we operate. Specifically, we contribute to local communities by supporting charity, education, environmental protection, health, and disaster relief efforts. We aim to become part of local communities, create value for them, and help them achieve prosperity and sustainability. Operations in Compliance with Applicable Laws and Regulations Anti-Corruption and Anti-Bribery Huawei abides by business ethics, operates with integrity, complies with applicable laws and regulations in countries where we operate, and prohibits bribery and corruption. In 2013, Huawei continuously optimized our control mechanism for preventing and eliminating bribery and corruption, and required all employees worldwide to adhere to the Huawei Business Conduct Guidelines (BCG) and attend associated training. Furthermore, Huawei also asked all partners and suppliers to sign the Anti-Bribery, Honesty, and Integrity Agreement.

Huawei abides by ethical business practices, conforms to international conventions as well as laws of local countries, and operates with integrity. We adhere to the BCG, implement “transparent procurement” and “transparent sales”, and oppose bribery and corruption. In addition, we advocate fair competition and obey antidumping and antitrust laws and regulations defined by local countries. We protect our own intellectual property rights (IPR) while respecting the rights of other IPR holders, and ensure that Huawei complies with international IPR regulations. All these initiatives aim to create a harmonious business ecosystem.

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Sustainability Risk Management Ensuring Safety in Engineering Delivery To meet customer requirements and comply with applicable laws and regulations, Huawei has set up specialized departments for Environment, Health, and Safety (EHS) management of subcontractors and engineering delivery activities through cooperation with subcontractors. As a result, our delivery employees are protected against health and safety hazards, and our engineering delivery activities will not adversely affect the environment. Huawei has developed four EHS management strategies for delivery projects: “practice EHS leadership and

Huawei’s executives are conducting security check at the engineering delivery site

EHS Absolute Rules

build an EHS culture and atmosphere,” “require subcontractors to implement EHS,” “apply the minimum EHS standards and comply with EHS absolute rules,” and “warn about accidents ahead of time, report violations, and hold violators accountable.” These strategies are set to achieve the

Don’t

Do Wear a seat belt when driving

Never work under alcohol or drugs

Wear protective equipment when working at heights

Never exceed speed limits when driving

Operate powered-on equipment only when qualified

Never use the phone when driving

EHS goal of “zero accidents, injury, and pollution” during project delivery. For high-risk areas, such as transporting equipment, working at heights, and operating powered-on equipment during project delivery, we have developed “six absolute rules for EHS management of delivery projects” as the EHS management red lines. All delivery personnel must obey these rules. Building security leadership is crucial for security management in engineering delivery. Huawei’s executives have become more and more concerned about security management and set an example by participating in security management at construction sites. In 2013, Huawei executives at the regional vice president level and above paid 77 visits to project sites for security checks.

Sustainability risk management is a priority during our operation activities and service processes. We are mindful of EHS management during engineering delivery, and have continuously invested more in this regard and extended EHS management requirements to subcontractors. We also spare no effort to provide secure products to our customers and consumers. Additionally, we have established a sustainability management system and continuously improve our approaches to managing sustainability risks. We are becoming a global and industry leader in sustainability.

the audience, and emphasized the need for Huawei to collaborate with suppliers worldwide for win-win development. Customers and NGOs shared ideas about the trends and requirements of sustainability. Representatives from suppliers presented their best practices in sustainability. The conference was well received by the representatives present.

In 2013, apart from extensively adopting customer-oriented methods for managing supplier CSR risks, Huawei also transformed our risk management approach into one that focuses on efficiency management. We have incorporated sustainability requirements into our supplier management process, helped suppliers develop their capabilities and awareness, and boosted our procurement efficiency to set the trend for sustainability initiatives across the industry chain. For details, please see Huawei 2013 Corporate Sustainability Report.

Financial Terminology Operating profit Gross profit less research and development expenses, selling and administrative expenses, plus other (income)/operating expenses, net Cash and short term investments Cash and cash equivalents plus other current investments Working capital Current assets less current liabilities Liability ratio Total liabilities expressed as a percentage of total assets Days of sales outstanding (DSO) Trade receivables at the end of the year divided by revenue, and multiplied by 360 days Inventory turnover days (ITO) Inventory at the end of the year divided by cost of sales, and multiplied by 360 days

Days of payables outstanding (DPO) Trade payables at the end of the year divided by cost of sales, and multiplied by 360 days Cash flow before change in operating assets and liabilities Net profit plus depreciation, amortization, unrealized exchange loss, interest expense, loss on disposal of property, plant and equipment and intangible assets, and other non-operating expenses, less unrealized exchange gain, interest income, investment income, gain on disposal of property, plant and equipment and intangible assets, and other non-operating income. Exchange rates Exchange rates used in the annual report: CNY/USD

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onFROM environmentally paper. TO DIFFER Printed MATERIALLY THOSE EXPRESSEDfriendly OR IMPLIED IN THE PREDICTIVE STATEMENTS. THEREFORE, SUCH